Warren Buffett’s timeless philosophy of value investing has proven relevant and profitable in all types of markets and financial environments. With his great vision and strategies, he has converted holding company Berkshire Hathaway into a powerhouse today. According to Angel Broking, “over the last 52 years since Buffet’s company Berkshire Hathaway started investing in equities, it has given an annualized return of 21% compounded. What is more interesting is that in the last 52 years, the company has actually given negative returns only in 10 years.”
Warren Buffett is regarded today as the greatest investor of all time. However, what makes him so successful? According to financial experts, despite being simple, he believes in doing things patiently and differently because that’s the only way to stand tall in a crowd. Here are 5 investment lessons you can learn from Buffett to become rich and successful in your life:
1. Simple living, high thinking
It is all but natural to get tempted to replicate the lavish lifestyle of your neighbours and then start living beyond your means. However, does it make sense to buy a Rs 25-lakh car just because your next-door neighbour has recently bought a Rs 20-lakh car? Doing such things may increase your social status, but is certainly not good for your financial health. The first thing, therefore, everyone needs to do is to keep one’s life as simple as possible and stop imitating others. “I just naturally want to do things that make sense. In my personal life too, I don’t care what other rich people are doing. I don’t want a 405-ft boat just because someone else has a 400-ft boat,” Buffett says.
2. Invest in what you understand
One of the easiest ways to make an avoidable mistake and lose money is getting involved in investments that are overly complex. For instance, if you don’t have any idea of how stock markets work and how to select a stock, and you delve into the market just because of the lure of big money, then you are never likely to emerge a winner. Therefore, never try to put your hard-earned money into things your don’t understand. Warren Buffet always says that if you don’t understand a business, don’t buy it.
3. Avoid too much diversification
Investors are always advised not to put all their eggs in one basket and diversify their portfolio as much as possible. However, diversifying beyond a level is not good for your financial health because then you won’t be able to track your investments well. And leaving halfway can make you a loser. Maybe that is why Buffett likes to keep his investment portfolio as limited and simple as possible. According to his philosophy, keeping one’s attention limited to selected stocks and investment avenues, and not diversifying too much helps. Buffet says that over-diversification is only required when investors don’t understand what they are doing.
4. Avoid herd mentality
Should you start investing in stocks or ETF simply because other people are also doing it? Warren Buffett doesn’t believe in having the herd mentality. He says it is very easy to follow others, but very difficult to carve one’s own way out. However, it is only the second strategy that usually makes someone successful in life. This philosophy holds true while investing in any investment avenue or stocks as well. “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well,” Buffett says.
5. Don’t invest in the same business again
Buffett also does not believe in reinvesting earnings in the same business, simply because no one can guarantee you the same return again. For example, suppose the stocks of a particular company or business that you bought two years back have given 50% return during this period and now financial experts are again advising you to invest in that company or business in the hope of earning the same return again. However, what is the guarantee that those stocks will fetch you similar returns again? On the contrary, you may also lose your hard-earned money. Therefore, never go only by the past performance of a company or business. Also try to visualize its future prospects and as well as the prospects of its competitors, and only then take your investment decision.