The Creed of Sage of Omaha- World’s Most Successful Investor

Mon, Aug 6, 2018 5:36 AM on External Media, Stock Market, Featured,

-ShareSansar

~Rishab Agrawal

Warren Edward Buffett born August 30, 1930 is an American business magnate, investor, and philanthropist who serves as the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of US$83.6 billion, making him the third wealthiest person in the world. Buffett has been the chairman and largest shareholder of Berkshire Hathaway since 1970, and he has been referred to as the "Wizard", "Oracle", or "Sage" of Omaha by global media outlets. He is noted for his adherence to value investing and for his personal frugality despite his immense wealth.

Buffett didn’t achieve these laureates overnight or depending on luck to favor him, he achieved this through his experience and evaluating his mistakes. He is known for following some principles while investing and as a result these principles have made him the third richest person in the world. These principles surprisingly, aren’t somethings that require excessive knowledge about analysis or use of complex methods to make an investment; rather these are some of the most basic principles that are based on the information available but most investors seem to miss out on it. These principles are:

Diversification Preserves Wealth but Concentration Builds Wealth

Many good investors stress the importance of diversification. But Warren Buffett tends to disagree with the idea. Buffett says that diversification is for people who don’t know much about investing. An experienced investor should choose stocks on a long-term basis and should have faith on his/her investments.

Some investors diversify their portfolios because they are afraid that any one stock might sink their entire portfolio; but, while doing so, it becomes much harder to keep track of the current events impacting each company. So, by diversifying, they might reduce the volatility of their portfolio, but at the same time they reduce their focus on individual investments.

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

Make Investments That You Understand

Buffett cautions that you should never invest in businesses that you don’t fully understand. He says that if before he invests in the stock of a company, he has to first understand how the company makes money and the main drivers that impact its industry in no more than 10 minutes. If he’s not able to understand it in 10 minutes, he moves on to evaluate another company on this basis. In situations that rely on an accurate forecast of the future, Buffett advises not to invest.

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Operated by Able and Trustworthy Management

Buffett has valued the quality of the management very highly. According to him an investor should always invest in a business run by honest and trustworthy people as these qualities are rare but it ensures that your investment is in safe hands who wouldn’t do anything unjust. He emphasizes that it takes 20 years to build a reputation and five minutes to ruin it. You’ll do things differently if you think about that.

“Honesty is a very expensive gift. Don’t expect it from cheap people.”

Learn from Your Mistakes and Move On

You might be astonished to know that even Warren Buffett makes mistakes – big ones too. But he makes sure that he learns from his mistakes. Buffett advises keeping a record of the mistakes you’ve made so that you know what went wrong and make sure you don’t repeat them again. Buffett further says that you should share these lessons with your children and grandchildren so that they know what mistakes not to commit.

“Someone’s sitting in the shade today because someone planted a tree a long time ago.”

Don’t Be a Day Trader

According to Buffett, the secret to getting a better return on investment is to buy a stock and forget about it. He believes in having a buy-and-hold mentality and insists on holding stocks for decades.

There are two principles behind this: (1) if you buy a stock for less than it’s true worth, the stock’s price will eventually converge with its intrinsic value; and (2) if you buy a wonderful business, the value of that business will compound and increase exponentially the longer you hold on to it. So, the patient investor will ultimately be rewarded if they hold on to their stocks for a longer time. For Buffett, time is the friend of a wonderful business.

He says that if you constantly buy and sell stocks, it’ll take away a significant percentage of your returns in the form of trading commissions and taxes. So, it’s better to buy great stocks and holding them for a long time.

“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

These principles have proven to work wonders for Buffett while investing and will do the same for you. On the basis of the above stated principles, an investor can improve his/her investment prospects and reduce uncertainty to a bare minimum. To summarize the above mentioned principles, it is better to be an informed investor than to invest on the basis of noise and rumors, honest people are worth investing not to forget for a long term and mistakes are opportunities we must capitalize on by evaluating them and learning from them.