How to Be a Self-made Millionaire by Investing - Investment Philosophies and Strategies of Warren Buffett - Investment - Stocks and Bonds
How to Be a Self-made Millionaire by Investing - Investment Philosophies and Strategies of Warren Buffett by Darl Fuwong
in Investment / Stocks and Bonds (submitted 2009-09-24)
Investment in stocks and shares is one of the fastest and most common ways to become a millionaire. Warren Buffett is undeniably the best example of a billion-dollar investor. To be a successful investor like Warren Buffet, it is important to get into his mind - understand his beliefs towards the market and his investment strategies.
1. The market is irrational
Warren Buffett believes the market is irrational. The market is always driven by greed and fear. I bet you know of people who buy stocks when the market has gone up and sell them when the market came down. Or are you one of them? If you have done your homework and understand the intrinsic value of the companies you have bought into, you will feel secure and will not worried about roller-coaster stock prices.
2. No one can predict the market consistently
Have you heard stories of people who spend money to buy mysterious trading systems, hoping to make good profits but only to be disappointed? Average investors always try to predict the market's next move. When they cannot predict themselves, they give money to the "experts" who claim they can. Warren Buffett believes successful investment has nothing to do with the ability to predict. Master investors know that no one can predict the market consistently.
3. Huge returns with little risk
Most people talk about "high risk, high return" but Warren Buffett believes in huge returns with little risk. In fact, Warren Buffett is an extremely risk adverse investor. His first rule for investment is "Never lose money" and his second rule is "Never forget the first rule". People think investment is risky because they have not learnt how to do it properly. Just like driving, isn't it risky to drive on the road if you haven't learnt how to drive properly? If you learn the proper way to do it, you can reduce the risk substantially.
4. Invest in few great companies
Most investors are taught by the experts to "diversify, diversify, diversify". Hence, they bought into many mutual funds and keep small holdings in many different stocks. Warren Buffett thinks diversification is for people who don't know better. By investing across the market, you will go up and down with the market. The key to outperform the market is to identify great companies and focus your investments in them.
5. Make decisions base on strict criteria
Most average investors make decisions based on emotions. They are tempted when they learn of hot tips or see their friends making quick profits, only to sell immediately when the stock price fall the next day. Successful investors follow a set of strict criteria to decide when to buy and sell. Investment criteria are rules that you follow to determine which stocks to buy, when to buy and after buying, when to sell. Some examples of investment criteria are: the company must have growing revenue and profit for the last 5 years, return of equity must be more than 15%, long-term debt must be less then 3 times of earnings, etc.
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