5 Golden Investment Lessons From Warren Buffett

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90th Birthday of Warren Buffett, The Oracle of Omaha

Introduction

Here are 5 golden investment lessons from Warren Buffett, popularly known as the Oracle of Omaha on his 90th birthday today.

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5 Golden Investment Lessons From Warren Buffett

The basic ideas of investing are to look at stocks as business, use the market’s fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing. - Warren Buffett

Warren Buffett’s timeless philosophy of value investing has proven relevant and profitable in all types of markets and financial environments. Lets see what are the 5 golden investment lessons from Warren Buffett?

  5 Golden Investment Lessons From Warren Buffett
5 Golden Investment Lessons From Warren Buffett

1. Invest in what you understand

  • You should invest in those business which you understand. You should understand the business operations you are investing in.
  • Never try to put your hard-earned money into things your don’t understand. Warren Buffet always says that if you don’t understand a business, don’t invest in it. If you don’t know about particular sector or company then never dare to invest on the basis of knowing risk or just for gambling.
  • The key meaning of investor is being a shareholder. Shareholder is the owner of the shares of company sharing the profits of that business. That is the reason why you should know where are you investing in.
  • He has been investing in simple business which he understands thoroughly like banking, consumer goods, oil, paper industry etc whose businesses are consumption based. The businesses which are going to grow certainly for next 10-20 years.
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2. Invest in Productive Assets

  • Always invest in productive assets. The assets which will produce returns for you rather than remaining idle. Warren Buffett says, never invest in Gold.
  • We know currently gold prices are rising, crossed Rs.50,000 per 10 gram. One may argue that gold is giving higher returns than equity investments in last 1 year. However, one should always look at the historical average returns while doing the comparative returns analysis.
  • Since 2000-2020, Gold has given CAGR returns of 13.46%, while Nifty 50 has given 13.5% in spite of sluggishness in the market since last 2 years. it is mainly because of the recent Gold rally of 65% over last 1 year (2019-2020).
  • If we consider 2000-2019 tenure, keeping aside the recent 65% of rally, Gold has given CAGR Returns of 11.36% vs 14%-15% by Nifty 50.
  • With the revival of the economy in coming quarters, both Nifty & sensex will give the expected performance in near future. As the earnings will increase with the positive measures from government side, the sensex is expected to cross even 50,000 level in future.
  • So, avoid gold investments and invest in productive assets which are going to grow in course of time and give you the corresponding returns.
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3. Cash is a Bad Investment

  • One should never put a lot of money in the form of cash. You should not keep much liquidity with you. One should always think from investor’s point of view to generate the returns from existing assets.
  • When you deposit the excess cash in savings account, the same cash can be used by banks for lending others. As a result, the idle cash can be pulled intto the economy which can be used in a productive way.
  • In the developed countries like USA, Japan, the investors are charged for keeping the cash idle. They are forced to invest the liquidity in the productive assets like equity.
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4. Too Much of Diversification is Not Good

  • Investors are always advised not to put all their eggs in one basket and diversify their portfolio as much as possible. However, diversifying beyond a level is not good for your financial health because then you won’t be able to track your investments well. 
  • Buffett says that Too of Diversification is not good for your investment. According to his philosophy, keeping one’s attention limited to selected stocks and investment avenues, and not diversifying too much helps. 
  • One should always note a point that wealth is created through concentration. On the other hand, wealth is preserved by mitigating the risk through diversification. But, too much of diversification can damper the performance of your overall portfolio.
  • You should plan your portfolio with bonds, bond funds, PPF, NSC, equity, mutual funds, and on the risk side medical and term insurance.
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5. Avoid Herd Mentality

  • Warren Buffett doesn’t believe in having the herd mentality. He says it is very easy to follow others, but very difficult to carve one’s own way out.
  • Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. One must be fearful when others are greedy.
  • One should not fall a victim to daily market movements and should invest with a long term view. The stock market always returns to investor who have patience to hold their investment.



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