Buffett’s Five Points on Investing:
Buffett summarized sound investing principles in 5 concise bullet points. I have paraphrased what he wrote below, along with some of my own comments:
- You don’t need to be an expert in order to achieve superior returns. However, you do need to understand your own limitations, i.e. if you are not good at stock picking, don’t do it. Don’t ever try to make a quick profit.
- Focus on the productivity of the assets. For a stock, it simply means that you need to focus on the earnings and cash flows of the business. if you can’t estimate the company’s future earnings stream, don’t invest in the stock. Why try to jump over a 7 foot bar when you find another 1 foot bar you can step over.
- If you buy a stock because you think the price will go up, that’s speculation. An even worse mistake is to buy a stock because it has gone up. Momentum investing is fun, but only if you can get out before the train wreck, which is hard to do on a consistent basis.
- Don’t worry about daily market fluctuations. There is no need to check the value of your portfolio on a daily basis. It would be silly to phone the real estate broker every day asking the price of your house. Yet, many investors check their portfolios every day.
- Macro investing is pretty much useless for long term investing. Listening to the advice of market pundits may blur your own vision of facts that are really important. Most DIY investors are saving for retirement and have investment horizons longer than 10 years. Why worry about whether the market will drop 5%? Do you worry when the temperature drops from 80 to 76? The magnitude of change is the same (5%) in both cases, yet many people hardly notice a 5% change in temperature, but get extremely emotional about a small 5% decline in the market.