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BW Businessworld

The Top 5 Buffett Principles For Investing In Stocks

There's no guarantee that reading this will make you as rich as Buffet is, but it sure is worthwhile knowing what some of his key investment philosophies are

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There's no arguing that Warren Buffet is the most successful investor in the world. We all aspire to invest like him, and a thousand books have been written about his life and investment philosophies. Yet, few can claim to have created wealth exceeding $ 60 Billion from their investments. There's no guarantee that reading this will make you as rich as Buffet is, but it sure is worthwhile knowing what some of his key investment philosophies are.

Know why you're investing
Ask most retail investors why they just invested in a certain stock, and chances are they'll be clueless. That's akin to digging your own grave when it comes to stock market investing. Sure, some of these stocks will go on to make money - but it's essential that you recognize that this was a chance outcome more than anything else.

Before you invest in a stock, understand that you're investing in a company more than anything else. That company has a business model, a marketplace, a management team, and a balance sheet. Eventually, how the company does will determine how your stock does. Take time out to understand it.

Remember that "cash" is a position too
This is something that people find it hard to wrap their heads around. Buffett believes that you don't necessarily need to be invested all the time. Oftentimes, you'll either not find enough time to research stocks, or you may just feel that there's no worthwhile opportunity available now. At such times, it may just make more sense to stay invested in cash funds instead.

The converse applies too. When market fall and stocks become cheap, don't be shy of deploying the cash aggressively into quality stocks. In the words of the great man himself, "Opportunities come infrequently… When it rains gold; put out the bucket, not the thimble."

Sell at the Right Time
Wow, if only we had an easy answer to that! But here's a general guiding principle - think long term (at least five years or more). However, follow your portfolio companies closely. If one or more reasons why you invested in the first-place changes, consider an exit. For instance, you may have invested keeping in mind the strength of the management team, and the top management goes through a mass exodus. Exit!

Don't speculate
It's a well-known fact that Buffett missed the entire dot com boom (and subsequent bust!) of the early 2000's because he refuses to speculate. Speculation is when you aim to benefit from price movements which could go either way, and which you don't fully understand. Buffett couldn't understand why a company that's bleeding $50 million a year should be worth $ 1 Billion on the bourses. So, he stayed away; the rest is history.

Cheap doesn't necessarily make it worth buying
Buffett once famously said: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Just because a stock is available for Rs. 10 and another one for Rs. 2000, doesn't make the former more lucrative. The Rs. 10 stock may be intrinsically worth Rs. 1, and the Rs. 2000 stock worth Rs. 5000. Do your research before you make a judgment call.


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