Warren Buffett’s Advice for the Youth

vemuda.com - Warren Buffett is known worldwide as one of the most successful people when it comes to investing.

Have you ever wondered how he keeps making countless right moves and what makes him so fortunate when it comes to buying stocks?

Source: Getty Images by Paul Morigi

Wouldn’t you like to know how his company continues to get huge returns at the end of each year?

Well then stick around as we look at some of the principles he applies that you as a young investor might want to know.

So, below are some of the philosophies that Warren Buffett lives by when it comes to investing:

1. Learn some basic accounting

The best advice Warren Buffett can offer to young people who want to invest is to learn accounting.

Knowledge of accounting helps investors determine an assets' value, understand a company's financing sources, calculate profitability, and estimate risks embedded in a company's balance sheet.

He warns investors against obsessing over stock price charts and urges them to focus on buying good business instead.

The 89-year old billionaire CEO of Berkshire Hathaway, whose childhood consisted of running a paper route and selling packs of gum and Coca-Cola, door to door among other pursuits, bought his first stock at 11.

He taught himself the fundamentals of accounting which goes a long way when it comes to investing. And the fact that he bought his first stock at just 11 years old, shows that it’s never too early to start investing.

2. Only invest in what you know and nothing else

One of the mistakes that many people make when it comes to investing is getting involved with complex businesses.

Many of you have probably worked in a handful of different industries already and have a certain level of competence and understanding of how these markets work and even where the best companies are.

However, you probably have little or no experience when it comes to the majority of publicly-traded companies.

This doesn’t mean that you can’t invest capital in this area of the market, but you should approach it with caution.

A majority of companies such as biotech companies operate businesses that are too difficult to understand. And because of this, the earnings generated are arguably unpredictable. When you come across such a business it’s probably better to make a pass on it.

There are more than enough businesses to invest in that are much easier to get a hang of, so why not invest in those rather than scratch your head trying to understand one that is just too difficult.

It is for this reason that Buffett has avoided investing in the technology sector over the years. But awhile ago, the oracle realized that he can’t avoid it forever, and not too long ago he bought 250 million shares of Apple for $35 Billion.

3. Never compromise when it comes to the quality of the business

Identifying a high-quality business to invest in can be quite a challenge. Over the last 50 years, Warren Buffett’s philosophy has evolved to focus almost exclusively on buying high-quality companies that have the potential to be long term opportunitie for continued growth.

It might come as a shock to many investors that the name Berkshire Hathaway, comes from one of his worst investments.

Berkshire was in the textile manufacturing industry and Buffett was convinced to buy the business because the price seemed cheap.

He believed at the time that if you bought a stock at a relatively low price there’ll be some unexpected good news at some point that would give him a chance to unload the position at a decent profit even if the long term performance of the business remains terrible.

With more years of experience under his belt, Buffett changed his stance on this and said that unless you are a liquidator, this kind of approach to buying a business is foolish.

In a challenging business, just when one problem seems to be resolved, another surfaces.

These types of companies usually earn low returns, further decreasing the initial investment value.

Therefore, as Buffett likes to say, it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

4. Buy a stock that you plan to hold forever

One of the questions that often come up when it comes to investing is how long should you hold the business that you acquired for?

Buffett’s response to this is if you aren’t thinking about owning a stock for five to ten years, don’t even think about owning it for ten minutes.

In one of his company’s annual letters, he writes that their holding period is forever. This is unlike those who rush into selling and get profits when companies perform well but tenaciously hold on to businesses that disappoint.

He has held stocks in Coca-Cola for more than three decades while remaining a faithful consumer of its products.

In the same letter, he mentioned that he expected to hold stock in Coca-Cola for a long time. He embraces a buy and hold approach which leaves many wondering why.

Well, one of the reasons is it’s not easy to find excellent businesses that continue to have a bright long term future.

Another reason is that trading activity is the enemy of investment returns. Constantly buying and selling stocks eats away at returns in the form of taxes and trading activities. So it’s just better to buy right and sit tight.

Lastly, quality businesses earn high returns and increase in value over time. He says that time is the friend of a wonderful business.

Fundamentals can take years to impact a stock’s price and only patient investors get rewarded. I guess in this case patience really does pay.

5. Diversifying is very risky

A number of you tend to buy several stocks across a number of industries. Buffett, however, does the complete opposite.

He invests with conviction behind his best ideas and realized earlier on that the market rarely offers up great companies at reasonable prices. He says that opportunities are infrequent and when it rains gold, pull out the bucket, not the thimble.

Some investors excessively diversify their portfolios mostly out of fear, ignorance, or both.

Owning so many stocks makes it nearly impossible for an investor to keep tabs or be up to date with the current events that have an impact their companies in one way or the other.

Excessive diversification also means that a portfolio is likely invested in a number of mediocre businesses, thus diluting the impact of its high-quality holding.

How many stocks do you own?

If your answer is more than 60, you might seriously want to consider toning down your portfolio to focus on your high-quality holdings. Once again quality beats quantity.

6. Investing is not brain surgery, but there really isn’t an easy button either

Perhaps one of the greatest misconceptions about investing is that only sophisticated people can successfully pick stocks.

It doesn’t take a genius to follow Warren Buffett’s investment philosophy, but it’s quite difficult to consistently beat the market and sidestep behavioral mistakes.

You must know that there is no such thing as a magical set of rules, a formula or an easy button that can generate market-beating results. It doesn’t exist and most likely never will.

Also, be on high alert for self-proclaimed ‘gurus’ selling you a rule-based system to investing.

I mean if such a system actually existed, then the owner wouldn’t have to sell books or subscriptions, right?

Sticking to a certain set of principles of investment is fine but investing is still a difficult art that requires a lot of thought and shouldn’t feel easy.

7. Understand the difference between price and value

There can be periods in the market where stock prices have zero correlation with the longer-term outlook for a company.

Many negotiations were made during the financial crisis because investors were quick to sell off all companies regardless of their business quality and long term earnings potential.

Many firms continued to strengthen their competitive advantages during the downstream and emerged from the crisis with even brighter futures. A company’s stock price was temporarily separated from its underlying business value. 

As a long term investor, it would be beneficial to heed Buffett’s investment advice to buy quality when it is marked down in price and not be too quick to deem something as having low value.

Price is what you pay, value is what you get. Stock prices will vary with investor emotions, but that doesn’t mean a company’s future stream of cash flow has changed.

You as an investor need to differentiate between price and value, concentrating your efforts on high-quality companies trading at the most reasonable prices today.

8. Low-cost index funds is the right way to go for most investors

Something that many people don’t know is that most investors actually fail to beat the market. And not by a small margin, but by a wide one.

Investors most often than not derail their performance in so many ways- attempting to time the market, taking unnecessary risks, trading based on emotions, taking on ventures that are outside their areas of expertise and many more.

And aside from this many actively managed funds charge excessive fees that eat away returns and dividend income.

Most stock pickers fail to generate performance that justifies their higher fees. But low-cost, passive indexing can be a great strategy for you as an investor to consider, especially if you are not concerned about generating stable dividend income.

9. Only listen to those you know and trust

Buffett is very careful when it comes to selecting his business partners and managers. This is because their actions can make or break an investment for many years to come.

Although you might lack the resources to really evaluate the character and skill of a public company’s CEO for investing purposes, you can certainly control who you listen to when it comes to selecting your investments and managing your portfolios.

The financial world is filled with many individuals-good and bad. Unfortunately, a number of people realize they can prey on investor’s unrealistic expectations, and feelings of fear and greed, especially those who are just starting out to make a quick buck.

Many of these self- proclaimed, quote on quote ‘experts’ are generally no better than you at predicting the future.

Wall Street is the only place that people ride in a Rolls Royce to get advice from those who take the subway. So be careful who you trust.

And one more thing, if you are a young investor starting off at the early stages, Warren Buffett says a proper attitude to investing is more necessary than technical skills.

So don’t worry if you don’t have enough expertise. It’s your mind-set that truly matters. Well, there you have it.

This is just some of the advice that Warren Buffett has for all those hoping to be top-notch investors one day.

Maybe just following these guidelines could make you the next Warren Buffett.

Who knows?

Thank you guys so much for reading, and I hope you gained value from this post. And with that said, I’ll see you all the next one.