Another year has passed, and it’s time to once again wish Warren Buffett a happy birthday.
Widely known as one of the best investors of all time, the Oracle of Omaha turns 92 today.
When he started on his own back in the 1950s, a group of investors entrusted around US$100,000 in cash with him.
Over the course of more than 70 years, he has grown this capital into a conglomerate, Berkshire Hathaway (NYSE: BRK.B), worth north of US$600 billion.
His net worth is estimated at a little over US$100 billion, putting him on the list of the top 10 wealthiest people in the world.
There’s a lot we can learn from Buffett’s wisdom, so here is a list of five tips that can help you to invest much better.
Tip 1: Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Warren Buffett offers a good reminder for us to focus on the risks relating to any investment.
Many investors get caught up in the excitement and foresee attractive returns when they park their money in stocks.
This enthusiasm sometimes blinds them to the risks associated with that investment, and these risks may manifest themselves at a later time.
Hence, it’s important to focus first on protecting your downside.
Once you’ve assessed the risks to be manageable, then you can comfortably allocate some money to the investment.
The upside will then take care of itself when the business does well.
Tip 2: Never invest in a business you cannot understand.
It’s better to stick with simple businesses that are easy to understand.
If the business is so complex that you need significant time and effort to study, it’s advisable to move on to another.
For instance, Sheng Siong Group Ltd’s (SGX: OV8) business is relatively easy to understand.
It is a retailer selling a wide array of goods with 66 outlets located in Singapore.
American conglomerate Procter & Gamble (NYSE: PG) also has an easy-to-understand business.
The consumer goods giant sells an array of body, adult and baby care products in more than 170 countries around the world.
However, a business such as Exxon Mobil Corp (NYSE: XOM), which produces and markets a variety of fossil fuels, lubricants and chemicals, is much harder to grasp.
Tip 3: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Quality matters when you are investing for the long term.
Wonderful businesses normally do not come cheap, but their ability to continue growing their revenue, profits and cash flows makes them worthwhile investments.
Apple (NASDAQ: AAPL) has demonstrated its ability to continue growing its top line.
The iPhone manufacturer’s fiscal 2022’s third quarter saw a record-high revenue of US$83 billion as the company also saw its active installed base of devices hit an all-time high.
Conversely, it’s better to avoid mediocre companies even if they are trading at cheap valuations.
In the long run, it’s the wonderful companies that will go on to compound your wealth while the mediocre ones may generate a return that barely beats inflation.
Tip 4: Be fearful when others are greedy, and greedy when others are fearful.
Buffett advises us to tread cautiously when other investors are optimistic (i.e. “greedy”) as valuations tend to be high for such stocks.
Investors sometimes bid up the share prices of popular companies as they suffer from a “fear of missing out”, or FOMO.
The recent meme stocks mania illustrates how risky it can be to follow the crowd.
Investors were pushing up the prices of stocks such as Gamestop (NYSE: GME) and Bed, Bath and Beyond (NASDAQ: BBBY) without regard to their fundamentals.
But when famous investor Ryan Cohen exited his position in Bed, Bath and Beyond, it triggered a 40% meltdown in the home goods retailer’s stock price.
That’s the downside.
On the positive end, when investors shun a stock because of a temporary event that sends its share price plunging, it could open up an opportunity to accumulate the stock at bargain prices.
After ascertaining that it’s not a value trap, you can then scoop up shares on the cheap as other investors flee in fear.
Tip 5: If a business does well, the stock eventually follows.
Finally, and most importantly, a stock will eventually do well if the business continues to perform well.
Rather than be fixated on the daily movements in the share price, it’s recommended that you track the performance of the underlying business.
If the company manages to continuously grow its profits and dividends, then its shares will become more valuable over time.
Not only will you enjoy capital gains as the stock price moves in tandem with business growth, but you’ll also be receiving a larger stream of passive income as dividend payments rise.
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Disclaimer: Royston Yang owns shares of Apple.
