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Investment lessons from Warren Buffett

05 August 20226 mins read by Angel One
Investment lessons from Warren Buffett
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More than 2000 books have been written on – Mr. Warren Buffett. His favorite investment advice is – an investment in index funds that has the potential to match the market index. If you don’t have the time to hand-pick stocks, index funds could be a great way to build your portfolio that shows consistent returns. Diversification is ensured and the costs associated are low as the fund is passively managed. To become rich over the years, Buffett suggests constant buying of the S&P 500 index through ‘thick and thin’.

What we can learn from Mr. Buffett

Most of his valuable investment lessons come from the annual Berkshire Hathaway shareholder meetings. In 1999, he had advised future investors to start early. Buffett usually starts scanning companies alphabetically and stops only till he has found the right investment for himself. He constantly reminds us that we don’t need anybody’s approval before making an investment. Just ensure that you completely understand the company’s business and that it falls within the ambit of your overall strategy. You don’t need tips and opinions from other fellow investors.

Warren believes that money doesn’t make much difference after a certain level has been reached. So, more than aiming for a really wealthy net worth like his, it is important to enjoy the journey. Nevertheless, we have a lot to learn from the Oracle of Omaha.

Always remember these rules

His #1 investment lesson is ‘Don’t lose money.’ His #2 investment lesson is ‘Never forget lesson #1’. ‘Don’t lose money’ means don’t let your capital run out. Avoid extremely risky investments, because, in case of an adverse happening, you won’t be able to play the game anymore. Warren Buffett’s investments over the years have not always been the absolute right choice. Mistakes were made and lessons were learned. But his mistakes were not drastic enough to completely wear him out. Some of his very crucial, evergreen teachings are as follows-

Stay debt-free

When you invest your own money, you don’t have to go through the mental trauma of worry or insecurity. You don’t have an obligation to make good someone else’s loss. Having adequate cash reserves is always a good idea. It opens up a lot of options for you – real estate, equity, giving loans, or simply depositing in fixed income or risk-free securities. Liquidity is of vital importance as it acts as a shield when the cards turn against you. However, you should never have too much money remaining idle with you. You have to take it upon yourself to maintain an adequate balance.

Only invest in industries that you are familiar with

If you don’t understand the business, do you think it is the right decision to become its owner? How will you know when to buy or sell the security if you can’t value the business? And how will you value a company if you don’t understand its business? No matter how much chatter is going on in the market about a particular industry/ company, or no matter how promising the investment seems, if it is not your forte, stay away from it.

Investment should be made in assets that are productive

Warren Buffett’s investment strategy majorly includes investment in assets that are expected to give promising returns. It is not a good idea to invest in products that remain idle. Buffett thinks investing in gold is not a great idea. Instead, wisely chosen equity compounded over a number of years has higher chances of beating the market.

Think outside the box and make sure you work really hard

Don’t blindly follow what the others are doing, and always make an investment backed by your own research. Warren Buffett cautions against ‘too much diversification.’ Diversification is a good risk protection tactic, but when you invest in a number of securities, you tend to lose track of what is important. It becomes practically very difficult to monitor stocks across various sectors and industries on a regular basis then. Mutual Funds and ETFs are a great way to overcome this problem, as they diversify on your behalf and do the work for you.

Let’s have a look at Warren Buffett’s portfolio in 2021

As last updated on 31st March 2021, 40.07% of Buffett’s portfolio is invested in shares of Apple Inc. He holds around 89 crore shares of the tech giant. The stock market guru has also invested heavily in Bank of America, which makes up 14.45% of his stock portfolio. The other significant investments of Warren Buffett include American Express, Coca-Cola, Kraft Heinz, Moodys, Verizon Communications, and Bank of New York Mellon.

Over the years we have seen that Warren buys stocks and holds onto them for years. However, we are witnessing some changes in this strategy. In Q1 of FY 2021, Buffett made active changes to his portfolio. Berkshire cut down Chevron by 51% and exited Suncor Energy. It also disposed of a major chunk of Merck and some other drug stocks. For a change, we saw Berkshire being a net seller. However, we know for sure that Buffett always considers the management capability and long-term value generation ability of a company while evaluating an investment decision.

How does he do it consistently?

Since 1965, Berkshire Hathaway has given an average annual return of 20%. Warren Buffett to date follows the teachings of Benjamin Graham, popularly known as the “father of value investing.” Value investing is a strategy whereby investors look for stocks that are priced significantly lower as compared to what they are really worth. This way, investors get their assets for a bargain and sell them only when the time is right. He is not concerned with what the other market participants are doing, he decided to shut down the noise a long time ago. He believes in gathering ownership in premium companies that he believes have a significant potential to generate returns. That is to say, Warren remains unaffected by the forces of demand and supply.

He likes when the debt to equity ratio is low and returns on equity are high. It is important that the entity has a distinguished business model. There has to be something special about the company that sets it apart from its competitors. The bigger the moat, the better the investment opportunity.

Final takeaways

In the book ‘Psychology of money’, the author writes that $81.5 billion in Buffett’s net worth came after his 65th birthday. He is a remarkable investor, but interestingly, he has been a remarkable investor for nearly 75 years. We often forget to give due credit to time. Don’t underestimate the power of compounding. Was it all luck for Mr. Buffett? No. Some of his wealthy possessions did come to him because the stars favored him. But he was successful in accumulating most because he put in constant effort, dug deep, and stuck to his gut. He was not afraid of contradicting the opinions of the crowd.


Disclaimer – The article is only for educational purposes and all the information given in the articles is available in the public domain.


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