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Every investor should be able to earn millions of dollars from the stock market during their lifetime. This is not a get rich quick scheme, but intelligent investing. Warren Buffett learned investing from Ben Graham. Initially he practiced Graham’s teachings, then his principles evolved and he finally beat his mentor’s investment successes. When Graham died, he left an estimated $3 million. Today Buffett’s net worth is around $45 billion. Graham once told California investor Charles Brandes, “Warren has done very well.”
Buffett started buying the stocks that were trading for less than net current asset value regardless of the company. He started reading Phil Fisher and was influenced by his partner Charlie Munger. He then slowly started to recognize the successes of growth companies. So, he started buying sustainable, competitive, growing companies with fair prices and holding them for the long term.
Buffett has shared his investment principles in Berkshire Hathaway’s annual letters, numerous interviews, and in speeches at different universities. If you have a goal to replicate Buffett’s investment success, you can do it by studying his investment principles and putting them to work for you, as I have done in the new book CREATING A PORTFOLIO LIKE WARREN BUFFETT: A High Return Investment Strategy. His overall investing principle is very simple, but execution of it requires patience and independent thinking. I am not advising you to go and buy the stocks that Warren Buffett buys. Rather, that you learn Buffett’s investment principles and buy your own stocks and manage your portfolio the same way he manages his. You will be able to replicate his investment successes and find success in the stock market.
Here are some key Warren Buffett principles:
1. Business Owner Perspective
Approach stock market investing from a business owner perspective rather than holders of tradable securities. If you are a business owner, how do you calculate your business success? It should be: increase in earnings and net income, increase in market share, penetrating new markets, introducing new products, and increasing customer service. As a business owner you are concentrating on long term success of the company. But in the stock market, the investing public behaves differently. They just track the stock price change rather than the underlying fundamentals of the company. For example, if they buy a share of General Motors at $15/share, after a month, if the stock trades at $13/share, they feel that they lost the money, instead of checking the fundamental value of the company. If you want success in the stock market behave like a business owner.
2. Never Lose Money In The Stock Market
Warren Buffett’s first rules of investing are:
“Rule 1: Never lose money.
Rule 2: Never forget Rule 1.”
What does this mean? Say you are buying stock at $10/share. You calculated the business is worth $15/share. You made a great buy because you bought your stock less than company worth. After a couple of months, the stock goes down to $7.50/share. You are checking your account, you already lost 25% of your investment. You checked the company fundamentals, is there any reason the company would drop in price? You didn’t find anything. The market dropped because of some bad economic news. In this situation, you really didn’t loose the money. This is just quotation loss. In this situation, you have to hold your shares until the market realizes your thesis about the company. If you are right, you should be patient until the market realizes the potential of the company. You hold the shares for a couple of years. Your thesis works out, the market realizes this company’s potential and bids up the price to $15/share. You sell the stock and make a profit.
3. Have A Long Term Focus
Long term investing, also known as buy and hold, does not mean buy a company’s stock and then forget about the company for 10 to 20 years. You need to buy a growth company and consistently follow its revenue and earnings growth every quarter and every year. As long as the company is growing at a decent rate, keep holding the stock for long-term gain instead of selling the stock to protect short term gain. In long-term investing, investors should ignore the stock price variation, which is happening every day depending on the market events.
These are just a few Warren Buffett principles. In CREATING A PORTFOLIO LIKE WARREN BUFFETT: A High Return Investment Strategy, I explain how to implement Buffett’s investing principles step-by-step, using actual investment examples. All you need is confidence, and to believe that you can replicate his investment success. Believe in yourself. You can do it.
Jeeva Ramaswamy is the author of CREATING A PORTFOLIO LIKE WARREN BUFFETT: A High Return Investment Strategy, and managing partner at GJ Investment Funds.