This is Vikaas here, Investment Advisor and Founder of www.jaagrav.com.
Today, I am going to talk about 8 ways to think like Warren Buffett. This is a book by Glen Curtis who condensed some of the best thoughts from another Book, The Warren Buffett Portfolio by Robert G. Hagstrom
Hope the talk inspires you to think like the legendary investor.
1. Think of Stocks as a Business
Many investors think of stocks and the stock market in general as little pieces of paper being traded back and forth among investors. While this may help prevent investors from becoming too emotional over a given position, but it doesn’t necessarily allow them to make the best possible investment decisions.
Hence, it is important for shareholders to think of themselves as “part owners” of the business in which they are investing. By thinking that way, investors will tend to avoid making off-the-cuff investment decisions, and become more focused on the longer term, enabling them to analyze situations in greater detail. This increased thought and analysis tends to lead to improved investment returns.
2. Increase the Size of Your Investment
While its rare for investors to “put all of their eggs in one basket”, however, putting all your eggs in too many baskets may not be a good thing either. Over-diversification can hamper returns as much as a lack of diversification.
Investors must do their homework before investing in any security. But after that due diligence process is completed, investors should feel comfortable enough to dedicate a sizable portion of assets to that stock.
If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business instead of adding money to the top choices?
3. Reduce Portfolio Turnover
Rapidly trading in and out of stocks can potentially make an individual a lot of money, but this trader is actually hampering his or her investment returns. That’s because portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission that must be paid in a given year.
Investors would also be more apt to ride out any short-term fluctuations in the business, and to ultimately reap the rewards of increased earnings and/or dividends over time.
4. Develop Alternative Benchmarks
While stock prices may be the ultimate barometer of the success or failure of a given investment choice, however, its more important to understand the underlying economics of a given business. If a company is doing good fundamentally, its share price will ultimately take care of itself.
5. Learn to Think in Probabilities
Bridge is a card game in which the most successful players are able to judge mathematical probabilities to beat their opponents.
Thinking in probabilities has its advantages. An investor who ponders on multiple probabilities in terms of risk, intensity and the probability that the company will be able to overcome the same would result in a better investment process and probably a better investment outcome.
6. Recognize the Psychological Aspects of Investing
Individuals must understand that there is a psychological mindset that the successful investor tends to have. More specifically, the successful investor will focus on probabilities and business economics and let decisions be ruled by rational, as opposed to emotional, thinking.
Key to overcoming emotions is to able to retain your belief in the real fundamentals of the business, and not get too concerned about the stock market.
7. Ignore Market Forecasts
Ignoring market noise in terms of forecasting, either doomsday scenario being prophesied, or eternal optimism being pronounced, investors should focus their efforts on isolating and investing in shares that are currently being ignored by the market. As the stock market begins to realize the company’s intrinsic value eventually, the investor would stand to make money.
8. Wait for the Fat Pitch
Ted Williams, the legendary baseball player would wait for a specific pitch, in an area of the plate where he knew he had a high probability of making contact with the ball before swinging. This discipline enabled Williams to have a higher lifetime batting average than any of the players.
All investors should act as if they owned a lifetime decision card with only 20 investment choice punches in it. This would prevent them from making mediocre investment choices and hopefully, enhance the overall returns of their respective portfolios.
Obviously, some of these are easier said than practiced.
Hope you enjoyed listening to this!!
For more interesting topics, you may check out my website, www.jaagrav.com. If you want to reach out to me, you may email me at vikas@jaagrav.com
Thanks!