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Warren Buffett, who is often referred to as the “Oracle of Omaha”, is regarded as one of the most successful investors the world has ever seen. Throughout his long and successful career, Buffett has frequently discussed his opinion on investing and how to become a successful investor. This eventually sparkled the creation of the 12 Investing Principles commonly referred to as Buffetts 12 Investing Rules, or Buffett’s Investing Laws.
The 12 Investing Principles encapsulate Buffetts philosophy on investing and provide the foundation for any investor to build a portfolio. The aim of these principles is to help investors gain stability and set a portfolio that is designed to protect against losses, maximize profits, and help them identify quality investments they can hold for the long-term.
1. Focus On The Long-Term: Buffets first principle, when it comes to investing, is that investors should focus on the long-term. Short-term investments and speculation can quickly cause losses or erode any profits. The key is to invest in quality assets so that the investor can enjoy the returns of the compounded growth over the long-term.
2. Buy Low: Buffet believes that good investments are those that are bought at the right price. In order to get good returns, it is important to buy quality stocks at a price that is lower compared to their intrinsic value. This means that investors must research a company, its financial statements, and market movements to get a good sense of the correct entry price for the stock.
3. Diversify: Diversification is an important principle for Buffett; he believes investors shouldnt have too many eggs in one basket. Having a diversified portfolio allows investors to safeguard their investments from sharp losses from any particular stock in the portfolio.
4. Evaluate the Management: When making any investment, it is important to know who is running the company. Buffett believes that investors should evaluate the success or failure of a company through the management team behind it. Investors should look at the past performance of the executives and determine whether they are competent or not.
5. Watch the Fees: Investment fees can eat away at an investors profits. Buffett advocates for investors to watch the fees they pay, especially when it comes to mutual funds. Mutual fund fees can get extremely expensive and erode away at any profits the investors might make. It is important to understand the fees and costs associated with any investable asset before investing.
6. Consider the Tax Implications of Investments: Its important to understand the tax implications of any investments that are made. Different types of investments come with different tax rates and implications. Buffet suggests that investors should seek out investments that carry low tax rates, as this can allow them to hold more of their returns.
7. Dont Follow the Herd: Just because everyone else is doing something, doesnt mean it is a smart decision! Many investors may be tempted to follow the crowd but according to Buffett, it is important to think independently when it comes to investing. Investors should always do their due diligence and not be afraid to go against the grain if they feel it is the right thing to do.
8. Invest in Quality Companies: Quality companies can act as anchors for a portfolio and provide stability. Buffett recommends selecting companies with high potential for sustainable growth and a history of strong financial reports. He believes that with quality companies, it is best to hold them for the long-term and let the compounded returns grow investments over time.
9. Pay Attention to Market Cycles: The stock market is largely cyclical in nature and can be affected by macroeconomic trends. Investors should pay close attention to their investments and be aware of any market cycles that could affect the stocks in their portfolio. Buffett suggests that when the market is low, it is often a good opportunity to invest in quality stocks at a discount price.
10. Avoid Margin Trading: Margin trading occurs when an investor will borrow money to increase their returns of an investment. This increases an investor’s risk exposure and can put their portfolio in serious jeopardy if the stock doesnt perform in the way it was expected. Buffett warns against any margin trading as it opens the investor up to great losses.
11. Dont Hold Losers: Buffett suggests that investors should not try and hold onto stocks that are falling in price. If a stock goes down, the investor should cut their losses instead of continuing to hold it hoping that it will go back up.
12. Stick To Your Plan: Lastly, Buffet recommends sticking to the plan that an investor has set up for themselves. An investor should have a diversified portfolio, but it is equally important to follow the plan over time and not become too reactive in terms of buying and selling. By holding an investor accountable and following their established plan, it can help protect against unwise decisions fueled by emotions and greed.
By following Warren Buffets 12 Investing Principles, investors are more likely to have more success in their investments. Keeping these principles in mind can help an investor determine where to put their money and how to best maximize their returns over the long-term.
