“He who wishes to be rich in a day will be hanged in a year” – Leonardo da Vinci
At first glance of the title, you might think I have met Warren Buffett. I am sad to say I haven’t. For those who have never heard of Warren Buffett, he is a billionaire investor who uses a simple buy and hold investment strategy. In 2015 according to the New York Times, his yearly average return over the past 50 years was 22%. This is phenomenal! I personally believe he is the greatest investor of all time due to his consistency at beating the market. Below are some of the lessons I have learnt from reading books about him.
Lesson 1: Preserve capital
Preservation of capital is the first and most important rule for Buffett. Warren Buffett’s first rule is “Never lose money” his second is “Never to forget rule number one”. When we focus on preserving capital we often avoid falling prey to looking for a quick profit. We scrutinize investments that are too good to be true and offer us abnormal returns.
Lesson 2: Risk Averse
Due to Warren Buffett’s first rule, he is risk-averse. When people think of risk aversion they often think of someone who doesn’t take any risks at all. A risk-averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks (Economic Times). In the case of Warren Buffett he looks for, “high probability events”. This means he looks for investments that meet his criterion.
Lesson 3: Develop Your Own Unique Investment Philosophy
Buffett has developed his own investment philosophy, which is an expression of his personality, abilities, knowledge, taste and objectives. This lesson is hard to implement because it involves reading books on investment or watching videos on investment. The more knowledge you have the better you can decide what you want to invest in and the criterion to determining when to buy or sell. To be a good investor it is key to learn from others.
Lesson 4: Invest in what you understand
Buffett was quoted in one of his letters to the shareholders, stating “…the market does not forgive those who know not what they do.” Many investors especially rookies have acted in hope that they are right not on understanding of the market. This is gambling. lt has resulted in large amounts of money being lost. The questions we should ask ourselves before we make an investment is, “Why should I invest?” and “Does this investment opportunity meet my criterion?”.
Lesson 5: Be patient
Buffett was quoted saying, “The trick is, when there’s nothing to do, do nothing.” As an investor never be pressured to make an investment because you feel you should invest in something so as to feel you are doing something. When you cannot find an investment that meets your criteria then be patient and continue looking.