I was reading a French Newspaper the other day and the journalist mentioned that we needed to go back to the basics of investing. That we need to forget about the volatility and our emotions and that we need to follow the good ol’ common sense.
In order to invest intelligently, he suggested 4 investing principles that Warren Buffett has used during all these years to become the most prosperous investor of all time. You know what? Buffett doesn’t bring his laptop with his complicated investing formulas and doesn’t show 10 thousand graphs with moving averages and delta, sigma and the rest of the Greek alphabet. He simply looks at easy-to-understand investment basics:
Regardless if a stock is the flavour or the month or not (you know, the stocks you keep hearing on the news every week as they used to do with RIM which has been replaced with Apple?), you need to aim for quality companies.
– good products
– good services
– good management team
– good financial structure
– good potential
– good, good, good.
You need to make sure that the company is not only good today but it has given itself the means to be good for a long time. This is what we call good quality stocks.
#2 Growth vs Profitability
Growth is nice but can the sector still be profitable once many competitors enter? Sometimes, we might be tempted to invest in a company that is the first in its niche. That we think the growth is there for the next 10 years. But what happen when everybody knows that the growth is going to be in a specific sector? A ton of competitors, copies arise like weeds in spring and the price drops. Therefore, will there be enough room for everyone to make good money after a few years?
#3 Risk of loss first
Buffett says that he looks at the worst case scenario at any time before investing. Therefore, he makes sure to know what his potential losses are. This is also why they keep 20G$ in liquidity in Berkshire.
They don’t make much on this cash sitting in the money market but they are sure to avoid depending on anybody else. They know they can go through a rough economic stretch. This is the kind of guy that will never be caught out by a sudden drop in the economy.
The funny thing is that when I invest in a stock, I usually think about the potential gains I can make and completely put the potential losses aside. I tell myself I am young and that I have enough time to make it right… Maybe I should realign my investment strategies with Buffett’s practices.
I actually did it once when I sold my Smith Manoeuvre portfolio back in May 2009 knowing that I was probably leaving a lot of money on the table but I also knew that I couldn’t stand more risk since my wife was quitting her job and we needed liquidity as a backup more than potential gains on paper!
#4 Disciplined Attitudes
Definitely, the most common and ignored investment advice: follow your investment strategy, not your emotions when investing! Stay disciplined and never sell when there is a wind of panic hitting Wall Street.
I have often run into clients who want to buy when it’s high and sell when it’s low… Unfortunately, we all want to make money when we see others doing well and we don’t want to be the only loser in the market 😉
Overall, I think I am way more aggressive than Warren Buffett but I also think that his basic investment advice are gold. Everyone should keep these 4 investment tips in mind before each trade they make!