Too many articles and books have been written about Warren Buffett, a world renowned value investor. His snippets of wisdom in the form of quotations and investing strategies have been overly repeated. However I believe that if investors are to read just one book about Buffett, then it has to be "How Buffett Does It' by James Pardoe. This book succinctly and beautifully articulates Buffett's investment principles in the form of 24 simple investing strategies. I've selected some of the best investment lessons from this book that will serve as an indispensable guide to making shrewd investment decisions.
1) Choose simplicity over complexity
The stock market isn't a mysterious entity reserved only for the finance professionals. One of the wonders of investing is that you don't require an advanced degree in accounting to be able to independently select stocks of your own. The internet is abreast with 'get rich quick schemes' promising the latest computer program or theory to deliver the gullible investor instant riches. Most turn out to be 'get poor quick schemes'.
Buffett believes in 'keeping it simple'. By this he means only investing in easy to understand businesses, run by honest and competent people. He wants fundamentally strong and enduring businesses which trade at a discount to their fair values. He is value investor, and therefore seeks unloved businesses shunned by mainstream investors.
Albert Einstein: "Make everything as simple as possible, but not simpler".
2) Make your own investment decisions
Buffett believes that financial professionals bring nothing to the table. People are too often focused on short-term trading; this incurs higher commission for the investor through the buying and selling of shares. Short-term trading is often hazardous to your wealth; investors are better off owning a portfolio of exceptional companies over a multi-year time period.
Investing in the stock market requires a basic knowledge of accounting and the financial markets. One such book which I thoroughly recommend is 'Shares Made Simple' by Rodney Hobson', a respected financial journalist. This is a beginners guide to the stock market, Rodney strips away the arcane jargon and mystique surrounding the financial markets.
3) Control your temperament
Investors should not let emotions get in the way of making the right decision. Too often investors experience the extremes of fear and greed, which drive the market in the short-run. These emotions can often cloud their judgment. Benjamin Graham (author of 'The Intelligent Investor') said that "the investor's chief problem, even his worst enemy, is likely to be himself". He realized that in the face of extreme events, investors often panic and behave irrationally. Investors instead should behave more like 'Spock (Vulcan character from Star Trek)'. Spock would think logically, look at all the data and facts before reaching an objective conclusion. In the face of highly volatile markets, the astute investor will remain calm and disciplined.
4) Be patient
Benjamin Graham, Buffets mentor, believed that the market is a voting machine in the short- run, tallying up firms which are the most popular. Where as in the long-run, the market is a weighing machine, analyzing the fundamentals of a business. Buffett therefore believes that investors should be willing to wait for a 3-5 year time horizon, in order for their stocks to reflect their future earnings potential. Buffett was a 'decade trader' and not a 'day trader'. Charlie Munger, Buffett's long-term business partner described the need for patience less elegantly, by saying "Investing is where you find a few great companies and then sit on your ass".
5) Buy businesses, Not Stocks
Investors often forget that when you're investing in shares, you are buying a part of an actual business. As an owner of that business, you share in the profits and growth of that company through dividends and capital appreciation. A share is not a lottery ticket, and hence investors should be looking to invest in businesses, and not pieces of paper.
6) Build a concentrated portfolio
Buffett believes that investors should avoid the 'Noah's Ark' style of investing, that is I'll have a little of this, and a little of that. Investors should instead become an expert in a small number of a companies, rather than possess little knowledge of many stocks. It takes courage and conviction to hold a concentrated portfolio of high quality companies, but it is this principle that has made Buffett extraordinary wealthy. Building concentrated portfolios was also embraced by famous investors like 'Jim Slater'; he referred to this approach as the 'Zulu Principle'. The Zulu Principle teaches you to focus on one specific area and master that niche area, rather than knowing very little about everything. Applying the Zulu Principle helps you become the master of your niche area, in a very short period of time.