Revolutionize Your Wealth: Unlock the 8 Golden Rules of Investing (Warren Buffett)
Warren Buffett is known today as one of the best investors to have ever lived.
If you had invested just one thousand dollars in his investment company, Berkshire Hathaway, when he took it over.
You would have over 21 million dollars today even with the shaky market conditions.
That’s an average return of nearly 20%, which exceeds the return of the S&P 500 which has an average return of around 10% a year.
But what has Warren Buffett done right to obtain such amazing results and go on to become one of the richest men in the world?
The key factor here is to invest so that you can reach your financial goals several times faster, but the only problem is that investing is hard, and it’s rather complicated and competitive if you don’t know the rules, as it is often thought of as a zero-sum game.
You would probably lose all the money that you worked so hard to earn.
However, in this article we are going to cover a set of key principles that you should follow to be one of the few people who actually make money by investing.
Make sure you watch all the way until rule number 7, that’s the concept that really opened my eyes!
Rule #1
I am going to start off with rule number 1, now this might cause a lot of debates and that is diversification is not the end-all be-all in investing.
What is the magic number of stocks that you own on average?
Is it 10? 15? 20?
Well, experts usually suggest between 20 to 30 in order to diversify your portfolio as the unsystematic risks are reduced to a certain threshold.
But this always makes me wonder, let’s say you have yourself an excellent company within your reach.
The company produces fantastic products, has strong numbers on its financial statements, and a reliable management is spearheading the direction of the firm.
So tell me, why would you put your money elsewhere aside from this company right in front of you?
That’s my take on diversification and why I personally think that it’s not the best strategy.
Now, you could argue that even if such a company does exist in the market, it is extremely rare and hard to find.
Well, you are correct, which is why my philosophy in investing is to just pick a few companies that are of good quality.
Which leads back to the question, how many stocks should you own?
The answer, as few as possible!
With each additional stock you add to your portfolio, extra effort and time needs to be spent following it, including reading quarterly earnings reports and making a financial analysis.
You should avoid putting all your eggs in one basket, but you should also not increase the number of companies you invest in just for the sake of diversifying.
There are some great companies in the market that have stood the test of time, like Coca-Cola, Microsoft, Berkshire Hathaway.
And since these are such great companies, they will be able to survive an economic downturn and continue to grow in value.
Rule #2
Rule number 2, never buy on a green day.
According to Baron Rothschild, a powerful nobleman of the wealthy Rothschild family, he said:
the time to buy is when there’s blood in the streets
This rule can not only be applied to the stock market, but also towards all types of investment.
People tend to rely on their emotions and invest based on their gut feelings as a result, when they should have been making rational decisions based on factual data and numbers.
For example, if a bank is going to go bankrupt, all the people who have their money saved in the bank would be losing their money if it happens.
So people would be fearful and rush immediately to the bank to withdraw all their savings, this would cause a chain reaction where everyone else sees it and does the same thing, ultimately bankrupting the bank.
This would cause other people to do the same, which will gradually affect the entire economy.
However this is all theory, in practice, well-established banks with deep roots will survive such a liquidity crisis but do end up losing a significant amount of assets.
In times of downturn, the uncertainty has made everyone panic in the financial market, leading to massive selloffs and scaring off potential buyers, which result in the huge crash in the market.
Eventually, the panic subsides and the market goes back to normal, and great companies will regain their value.
This is why if you had bought during the time of the crisis and weather through like a champ, the undervalued companies you bought would reward you generously.
Rule #3
Which brings me to rule number 3: patience.
Patience is everything.
Without patience, you wouldn’t have been able to hold through the storm to see the rainbow.
Let’s say you finally saved up a few months worth of your savings, but you look high and low and can’t find any good opportunity in the market, what do you do?
Do you hold it, invest in anything that is the current hype, or blow it all on something you wouldn’t even remember a few months down the line?
Now the answer, of course is, you wait.
Sure, sometimes opportunities will arise, and you will be able to quickly capitalize on it.
But oftentimes, these are traps that will drain you of your hard earned cash.
What to do?
Don’t rush, take it a step at a time.
Before you decide to click on the buy button, make sure to analyze the markets thoroughly, read additional articles and only pull the trigger when you are confident enough.
The same principles apply for selling a stock, don’t exit that position when the market is down just because everyone else is doing it.
You should carefully evaluate what is the core reason that the stock you owned is down, is it a company-specific issue?
Or is it just that the whole market is suffering from the latest crisis?
It could be a temporary thing or it could be permanent, but you won’t know unless you do your research.
Learn to be patient and don’t get swayed by your emotions.
Rule #4
The 4th rule of investing is the time value of money.
If I ask you, do you think time or money is more important? Now my guess is many would say money right?
I used to think that too, but now I see the value of time.
Let me elaborate, the problem with investing is that if you want to earn a reasonable amount, you would need to have a sufficiently huge starting capital.
If your thousand dollar investment earns a crazy 50% return, that’s still only $500 dollars extra.
But if you had invested 1 million dollars, a modest 7% return would give you $70,000 a year, which is not too shabby for income that is completely passive.
But the problem is how do you get that million in the first place, that’s the real headache.
You wouldn’t be able to save 100% of your paycheck, you still need to eat and sleep, and have a roof over your head.
And this is where the magic of compound interest comes to the rescue, even with just a 3,000 dollars initial capital, you will reach millions if you take advantage of time.
Let’s say you graduated high school and you have 1,500 dollars worth of pocket money saved up, that’s a reasonable amount of money for someone who is not working yet, and you decide to invest it.
You go to college and get a part-time job to earn some extra money, of which you also decide to invest by living frugally and cutting out any unnecessary items.
Well, a quick inspection will tell you that you can’t save that much, and this is correct.
Even if you assume your money that you save increases in line with inflation at around 3%, you would have put in a total of $182,969.48 over the course of 40 years.
But assuming you had kept the money invested and reinvested all the dividends, it would have grown to almost 9 times the amount you put in, at 1.6 million dollars.
An interesting thing is that in the first half of the 40 years, you won’t even cross the $200k dollar mark, but you would earn the rest of the 1.4 million in the second half of the 40 years.
Why?
That’s the magic of compounding at work, in other words the amount of time you let your money work for you.
Rule #5
Now, 40 years is definitely not a short time, this is why you need to keep on top of your investments, which is rule number 5.
It’s a good idea to periodically review the performance of your investments.
Choices that were right for you two years ago may not necessarily be the best for you now.
Whether you speak to an independent financial adviser or conduct your own review, it makes sense to reassess your investment choices regularly.
One important thing that you can consider doing is to monitor your investment performance, some investments you hold will almost certainly have performed better than others, so the attractiveness of some over others may change over time.
As higher risk is by no means a guarantee of higher returns, reviewing what you hold can also keep you on top of the overall level of risk you’re exposing your money to.
In addition, your immediate personal circumstances might have changed.
Your investment choices depend on many factors, some of which may be unique to your own circumstances.
For example, if a new job brings a higher income you might have more money to invest each month, and you may be more prepared to take on more risks in hopes of higher potential returns.
Regularly reviewing how and where you’re investing can help to ensure your investments still suit your personal circumstances.
This is particularly important as your investment objectives evolve over time.
Whether you’re trying to build up investments for a particular life event – like funding a major home purchase – or maximizing your pension fund, what you’re looking to achieve with your investments can change over the years.
Rule #6
Since we talk about fitting your investments with your personal circumstances, it is important to note that the stock market is not your only option, which is rule number 6.
When people hear the word investing, the first thing that comes to mind is the stock market, or the property market, or even maybe government or corporate bonds.
But it doesn’t have to be that way, although they are all excellent investing tools for different situations, they can also not be the perfect tool for the job.
Remember, investing is a personal journey, sometimes the best investment for me isn’t the best for you.
It could be that business you have been thinking of starting for some time now, or maybe it is your passion for coding when you have extra time after work, you could learn the skill for 3 hours a day and eventually be able to monetize it.
Investing in a course can also speed up the process as you would essentially be buying knowledge.
This can earn you much more than if you would have invested the cash in the stock market.
Having said that, investing doesn’t always need to provide a tangible and immediate result, investing in a self-help audiobook or personal finance book will have a long-lasting impact on your life that might not be obvious at the start.
The point here is to think outside the box.
Rule #7
The 7th rule is to play big and don't waste opportunities. There are many big opportunities in life that can be seized.
Warren Buffett, the Oracle of Omaha, said it best:
we don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it.
Doing it on a small scale is a mistake, and you might as well not do it at all.
He went on to describe it as having a punch card with just 20 punches, and this punch card follows you for the rest of your life.
Each hole is a financial decision that you made, and once it’s punched, there is no undoing it.
Remember when I said that the concept of rule number 7 opened my eyes, well this is it!
You would get really rich, as you would think very hard for each financial decision that you are about to make.
For example, if you went to a party and some random dude talked about a company whose name you can’t even pronounce, but they made some money last week.
You wouldn’t buy it now, would you?
There’s a serious temptation to dabble in the markets, particularly in a bull market, because it seems so easy, it’s even easier now as you can do it all online with just a click of a button.
Maybe it goes up a bit and you get excited about that and you buy more of it, but you can’t make any money long-term doing that.
Which is why the concept of the punch card is important, if you only have 20 punches in your entire lifetime, you would think long and hard before any investment decision and you would make good ones and big ones.
You probably won’t even finish using all 20 punches.
Rule #8
The 8th and final rule is that hope is not a strategy.
There are three types of companies you should invest in.
Type (i)
The first one is the ideal scenario where it's a stable company with products that sell, excellent management team, and solid financial track record.
So the company would probably continue its upward trend and so would your investment, if you decide to invest in this company.
Type (ii)
Secondly, the company is great, but its stock price is undervalued regardless of the reason.
Maybe it received some negative press recently due to some minor issues, but the stock will definitely rise back to its true value.
Type (iii)
Thirdly, the company isn't making money now, let's say it's a start-up, but it has great potential.
It might be a brand new industry, or they are developing breakthrough technology, and in the long run, they could be making huge profits.
But to be able to invest in such a company, you would need to have a deep understanding of that industry and the business overall.
You can't simply choose a company based on how cool the design of its logo is or what your Uncle Sam is telling you and hope that it will grow.
Can you get lucky?
Well maybe, but that hope is not a strategy. So invest only in companies you fully understand.
If you felt these 8 rules are useful for your investment journey, then be sure to share it with family and friends too.
Sharing is caring!
- Ivan