Legendary investor, Warren Buffet, celebrated his 90th birthday last week. For decades, the investing community has enjoyed his deep insights into the world of investing and indeed about life as he dishes out priceless nuggets. Here are some of my favourites:
“You want to be greedy when others are fearful and you want to be fearful when others are greedy.’’
The impact of emotion is often underestimated when it comes to investing. Yet two emotions are dominant market drivers in the stock market: Fear and greed. To be a successful investor, one must be in control of one’s emotions.
It is usually in an atmosphere of fear that investments are sold at bargain prices. Fear creates panic selling, which forces prices downward regardless of a company’s prospects. This provides a buying opportunity for the astute investor ready with cash to buy up the stocks that others are dumping. Ultimately, that long-term economic value will eventually pull the stock price back up in line with its fundamental realities; if a business does well, its stock is likely to do well.
Sadly, for investors who bought in the overheated market, it can take an extended period for the value of even the most outstanding companies to catch up with the price that they paid. They are also limited in their ability to take advantage of opportunities, as cash is tied down in vastly devalued portfolios.
“Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing.”
This is contrary to the popular strategy of diversifying risk, or not putting all your eggs in one basket. Warren Buffet leaves diversification to those who do not fully understand what they are doing or perhaps don’t have large sums to invest. After carefully studying an interesting company, he can confidently invest a significant sum. The idea is that such conviction will cause one to focus and do the necessary homework before investing, and closely monitor thereafter.
“Investment must be rational. If you don’t understand it, don’t do it.”
Warren Buffet spends time and effort studying interesting companies so that he can make an informed assessment of their long-term prospects.
Financial disasters tend to follow ignorance and greed; if you invest without understanding what you are investing in or because they worked last week for somebody else, the stock market can be merciless. It is important to understand what you are doing, or seek help from those who do. Do your homework and research on businesses in which to invest. Be rational in your investing journey and stick to what you know. “Risk comes from not knowing what you are doing.”
“Only buy something that you’d be perfectly happy to hold if the market shuts down for 10 years.”
This speaks to investing for the long-term. A longterm approach to investing will keep you on track in a bear market because you are invested to meet long-term objectives. If you put your short-term funds in the stock market, you are more likely to lose your money as volatility is a given in investing. It is in the long term that stocks have shown their ability to outperform many other asset classes.
“Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down. That’s what value investing is all about.”
When things are on sale such as clothes, household items, we tend to rush out to buy at a discount so why should we act differently when it comes to stock? We should look out for “sales” in the same way. To recognise quality merchandise and stock, do your research too and seek professional advice to ascertain the true intrinsic value of your purchase. This measure is arrived at through an objective calculation and not its currently trading market price.
“Nothing sedates rationality like large doses of effortless money. Successful investing takes time, discipline and patience.”
This speaks to a culture of wanting to “get rich quick”. It’s about instant gratification and wanting to make money right now and with little or no effort. Yet the most successful investors will tell you that it takes discipline, time and patience to build and sustain wealth. This is not just true about investing; it is true about life. True sustained success comes from vision, planning, hard work, and patience.
“It’s better to hang out with people better than you. Pick out associates whose behaviour is better than yours and you’ll drift in that direction.”
This encourages us to surround ourselves with the right people. There is an adage that says “You are the average of the 5 people you spend the most time with”. If you and your friends live without purpose and discuss only frivolities, seldom adding value to one another, either you all need to change your behaviour, or you need new friends! Choose people that encourage you, are ambitious, empower you, support you and of course, remember that relationships should be reciprocal; you must do the same.
“I believe in giving my kids enough so they can do anything, but not so much that they can do nothing.”
If you spoil children or over indulge them, you could be making it very difficult for them to be successful adults. Teach them to value money, and the importance of hard work, saving, investing, giving. Guide them in earning from their passion and talents. Children who have been groomed in money matters early, are more likely to become well adjusted and financially responsible adults.
“If you don’t find a way to make money while you sleep, you will work until you die.”
Financial freedom is attained when you can work because you want to and not because you have to. If you are serious about financial freedom and security, then do embrace the passive income machine.
Passive income generally includes income that is not directly related to your daily activity and which you can generate without having to actively work for it; in fact, your money is actually working for you with no extra effort on your part, apart from the act of active investing.
Creating a passive income stream takes time, effort, discipline, and consistency at the beginning of the cycle before it becomes passive. It will involve disappointment, failures and frustration, but if you invest your time and effort upfront, it can be the most fruitful and worthwhile investment of your time, as it continues to pay you long after the work has been completed.
“The difference between successful people and really successful people is that really successful people say no to almost everything.”
We must all learn to set boundaries for ourselves. For most ambitious people, we want to accomplish things. We are driven for results, doing more, learning new things, starting a new venture, starting a new role etc. We also have our personal lives and family priorities, social commitments, as well as the pursuit of interests and hobbies; these all need focus for balance and fulfilment.
Perhaps we need to simplify our lives. This means saying no to some of the unimportant things that come our way to distract us, and staying razor-focused on those things that truly matter.
The Coronavirus lock down ought to have highlighted this to us all; what truly matters. We must be careful not to go back to that frenetic lifestyle that we all let. Learn to say no.
‘ If you don’t find a way to make money while you sleep, you will work until you die ‘
“Invest in as much of yourself as you can, you are your own biggest asset by far.”
Investment in self is the greatest investment of all! You are your greatest asset. Invest in yourself constantly and be proactive about developing yourself both personally and professionally.
We live in a world that is in a constant state of flux. This presents both opportunities and challenges. You should always be learning, growing and adapting to the times. By continuously growing and learning, you will naturally become a better person; you also become more invaluable. Warren Buffet spends time learning and on personal development; yes, even at the age of 90.
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