Warren Buffet - the name that evokes inspiration and awe at the same time. Warren Buffet has been a constant source of inspiration for many generations of investors. His accurate and simple observations about trading and investing have acted as lessons for many ace investors globally. This article takes up snippets from the Warren Buffet trading strategy and helps you devise a foolproof trading strategy to generate healthy returns.
Why is Warren Buffet Popular?
Warren Buffet is the most successful investor of all time. He figures among the top-10 richest individuals in the Forbes 400 2021 list and Billionaires 2021 list. His present net worth is US$ 103.6 Billion (as of 11/11/2021). Besides being an investor and the owner of sixty (60) different companies, he is also the Chief Executive Officer (CEO) of Berkshire Hathway. Warren Buffet’s investment lessons have inspired and continue to inspire many well-known investors worldwide. The following sections talk about the best investment ideas shared by Mr Buffet and ways you can use them to sharpen your trading skills.
The Warren Buffet Trading Strategy Decoded
Buy Any Stock as Its Owner, and Not a Speculator
Investors and speculators comprise more than 95% of all traders in the market. While speculators can sometimes become investors, investors never speculate.
So, what is the difference between investing and speculating? Find out in the next paragraph.
Investors are hard-working people who devote their time, intellect, and money to pick high-quality stocks, mutual funds, etc., with immense growth potential. Investors expect sizeable gains from their investment over a long period. They do not worry about market volatility or temporary ups and downs. All they want is stability with capital growth.
In contrast, speculators analyse stocks that have high chances of going in either direction quickly. They do not invest the time needed to grow the capital healthily and want quick returns. While, at times, they do make insane profits, but the chances of losing the lion’s share of their investment always loom large in their minds.
According to Warren Buffet, you must be an investor and not a speculator to earn consistent returns from the market.
The Intangible Assets of a Company Are As Vital As Its Tangible Assets
Warren Buffet believes that a company’s intangible assets are sometimes more important than its tangible assets. In fact, he believes that a company’s intangible assets play a significant role in determining its tangible assets.
Tangible asset refers to a company’s physical assets, such as cash, vehicles, buildings, equipment, inventory, and investments. Intangible asset refers to a company’s goodwill, reputation, employee satisfaction level, patents, accounts receivable, etc.
The buffet was particularly impressed by the business model of the shop chain sees. See’s made a profit of US$2 million against the net tangible assets worth US$8 million., prompting Buffet owned Berkshire Hathaway to purchase it completely. Buffet’s bet paid off, as See’s profits started soaring to new heights.
Hence, before picking a stock for investment, you must analyse its reputation in the market. A company with higher acceptability in its respective market will most likely outperform its peers, irrespective of its tangible assets.
Overlook Short-Term Volatility and Focus on Long-Term Growth
To Buffet, the current price of a stock is an inaccurate indicator of its growth potential. He believes that no price is too high or too low for stock since the price is dictated by the collective whims of people buying or selling it. He further believes that a company with high inherent value will eventually shrug off minor disruptions and grow steadily.
Hence, if you have a long-term investment horizon, stop worrying about short-term volatility and focus on the company. A high-quality company’s stock will always perform well, irrespective of its short-term performance.
Buy When Others are Fearful and Sell When Others are Greedy
Whenever the market witnesses a huge financial or health crisis or extreme events, such as a war, the market tumbles. In such conditions, even the best stocks with super-strong fundamentals receive a beating. But, since the inherent value of growth stocks are high, they rise swiftly when the market recovers.
On a similar note, when the market is extremely bullish, even penny stocks with no apparent fundamental reasons to justify the rise. Also, the valuations of growth stocks might reach an insane level. Buffet advises investors to exercise caution during such extreme conditions and make an informed decision.
Therefore, before buying or selling stocks, you must analyse the overall market conditions and the company’s valuations before deciding something.
Warren Buffet Trading Strategy Can Give You The Right Direction
The Warren Buffet Trading strategy has acted as an inspiration for many generations of investors. Now it’s your turn to apply the concepts and redefine investing. 5paisa offers you a low-brokerage Demat account to test your trading skills and increase your true worth.