Warren Buffett is one of the world’s most successful investors and freely shares his views on how to make money in the stock market.
Buffett is the chairman and CEO of Berkshire Hathaway and one of the world’s richest people, with a new wealth of nearly $100 billion.
Affectionately known as the “Oracle of Omaha”, he has been the largest shareholder of Berkshire Hathaway since 1970.
He has consistently outperformed the market because of his ability to identify quality companies and buy them at a fair price.
Over the years, he has shared many investment philosophies and guidelines – many of which are based on Benjamin Graham’s value investing principles.
A tongue-in-cheek, but very valuable principle, is: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
Others include “If the business does well, the stock eventually follows” and “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Here are seven prominent rules from Warren Buffett for making money in the stock market.
- Look at the intrinsic value of a company and avoid emotions. The emotional nature of many investors creates huge opportunities for value investors looking for quality but undervalued companies.
- Buy quality companies at a fair price. Although you can make money buying average companies at a big discount, it is better to buy wonderful businesses at a fair price.
- Never invest in businesses you don’t understand. To invest in a company, you must understand what the economics of the business will look like ten or twenty years from now.
- Don’t miss big opportunities. Buffett’s biggest mistakes were the things he knew enough to do but sat on his hands and did not do it. You must seize big opportunities.
- Don’t sell shares because of price fluctuations. Keep good companies unless there is a good reason to sell them, like problems with management or the need for capital.
- Buy shares at less than what they are worth. Look at the company’s intrinsic value and only buy the stock if it offers value.
- Be fearful when others are greedy, and be greedy when others are fearful. When investors are fearful and share prices decline, it can offer good value investing opportunities. The inverse is also true.
Buffett shares many other rules, like “never invest on borrowed money”, but these seven rules are a good start to understanding his investment philosophy.