Warren Buffett’s Best 5 Pieces of Investing Advice
When Warren Buffett dishes out investment advice, you have to sit up and listen carefully. After all, he is not regarded as the world’s best investor for nothing.
Here are some strategies which have helped Warren Buffett become a billionaire.
1. Cash is the worst investment, but you must always have enough of it
Over time, cash is a bad investment is a no brainer. But you should always keep enough of it. When you have enough cash on you, there’s much peace of mind. Why? This is because you know you have a good control over your future or anything that may happen.
2. Invest in businesses you know and nothing more
Peter Lynch, a famous American businessman and stock investor, has said, “Don’t invest in an idea you cannot explain with a crayon.”
Warren Buffett’s says pretty much the same thing. And when it is coming from two great investors, it has to be true.
When you think of it, the advice is very rational. If you don’t understand how a business generates money or factors that influence in its industry, how can you predict its success? That is why it is best to stick with companies in industries which you are knowledgeable. Avoid overly complex publicly traded companies.
3. Invest in quality companies
Identifying if a business is complicated or not is easy. However, the same cannot be said about business quality.
While finding if a business has long term growth opportunity or not is a little difficult but it is worth the effort. Investing in a mediocre business, even if the bargain price is attractive, is not a good idea because such companies typically register low returns. Furthermore, they also face one problem after another.
According to Warren Buffett, it is much better to buy a quality company at a reasonable price than a mediocre company at a great price.
4. Invest for the long term
An advocate of buy and hold mentality, Warren Buffett strongly believes it is not worth investing in a trade for even 10 minutes if you are not prepared to hold it for many years. Quality businesses generate high returns over time and only those investors who are patient are rewarded.
5. Too much diversification is dangerous
Warren Buffett believes you should invest in few companies with great conviction. Finding quality companies is difficult, but finding quality companies in only those industries with which you are strongly familiar is double the difficulty. However, it is worth the effort and once you find a great opportunity, invest in it as much as you can.
On the other hand, if you own more than 50 to 60 stocks right now, you should seriously think about reducing the number. Over diversification means you have invested in mediocre businesses and/or companies about which you don’t have much knowledge.
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