Warren Buffett, who turns 91 on August 30, 2021, is a name that many stock market investors look up to. Many lessons can be drawn from Buffett’s investment philosophy and journey. Here are some of the most important lessons that investors can use to make the best decisions in a market with over 41,000 companies and 400 equity mutual funds.
1. Invest in companies/ funds that you understand
It is said that if you shake someone’s hand and only get four fingers back, you will never shake hands with that person again. When it comes to investing, the same holds true. Investing is about more than just returns; it is also about the risk you take in order to generate returns. If you have a bad experience with an instrument, you will never trust it again, regardless of its potential. As a result, it is critical to understand who you are investing your money with and what they intend to do with it. Doing some research on the companies or funds will allow you to make more informed decisions. It is perfectly acceptable not to invest in avenues that you do not understand, no matter how profitable they appear to be.
2. Invest in companies/ funds as an owner and not as a speculator
When you invest in a company/ fund, you are betting on its future growth potential, but at the same time, you become a part-owner regardless of the size of your investment. We all understand that building, growing, and sustaining growth within the company takes time. If you invest in companies/ funds for quick short-term gains, you may make money at times, but not over a long period of time. We all require a solid portfolio that serves as an anchor for our overall financial situation. This can be accomplished by approaching stock/ mutual fund investing more as an owner, where you give companies time to grow, perform, and generate good long-term returns for you on a regular basis.
3. Be fearful when others are greedy and be greedy when others are fearful
This is one of the most common and well-known lessons we’ve all heard many times, but it’s worth repeating, especially when the market crashes. The stock market/mutual fund never moves in a straight line; it always has ups and downs. Market movements are also influenced by factors such as greed and fear. When we look back to February and March of 2020, the Covid-19 pandemic brought the world into a panic situation. That is when the fear factor kicked in among investors, and the stock markets around the world began to correct. These are excellent times to invest because the companies/ funds in which you are interested will be available at a lower price as others continue to sell. On the other hand, everyone is talking about the stock market/ mutual fund investing and wants to know about more ways to invest and earn higher returns. These are the times to be cautious, as many companies/funds will appear attractive based on their past returns, with many investors willing to invest.
4. Do not borrow money to invest
There are times when stock market greed takes over and many investors feel compelled to invest every rupee in order to maximize their return. Some will even go so far as to borrow money or take out a loan to invest in the stock market, believing that the cost of borrowing is lower than the expected returns from the stock market. You should never borrow money to invest because the stock market is always risky, and if the situation changes, you will lose not only your investment but also your net worth because you will have to repay the borrowed money you used to invest. Following your defined investment allocation through your existing monthly surplus and existing investment portfolio is a sound strategy.
5. Do not watch the markets regularly
Stock market/ mutual fund investing is for the long term, and the key to investing in companies/ funds is to have enough patience with these investments. Looking at the market movement frequently may lead you to make poor decisions that will not benefit you. It may also have an impact on your disciplined approach to investing. A better strategy is to concentrate on the companies and funds in which you invest rather than their daily price movement.The stock market’s natural tendency to rise and fall on a daily basis creates both opportunities and threats. When it comes to stock market/ mutual fund investing, patience is essential. You can keep it simple by focusing on the things that will help you gain confidence rather than worrying about the stock market/mutual fund.