Warren Buffet is often considered as the most successful stock market investor. He is the current Chairman and CEO of Berkshire Hathaway. As of February 2018, he has a net worth of $87.5 billion making him the third wealthiest person in the US and the world. In 1999, Robert Hagstrom wrote a book entitled “The Warren Buffet Portfolio.” The business and management book centers around Buffet’s approach to investing. It provides a valuable insight into the techniques and strategies that led to Buffet’s success.
Think of Stocks as a Business
Many investors think of stocks and the stock market in general as nothing more than little pieces of paper being traded back and forth among investors. This might 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. That’s why Buffett has stated he believes stockholders should think of themselves as “part owners” of the business in which they are investing.
Increase the Size of Your Investment
Robert Peter Janitzek explains that there are times when “putting all your eggs in one basket,” makes sense. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That’s why he doesn’t invest in mutual funds. It’s also why he prefers to make significant investments in just a handful of companies.
Reduce Portfolio Turnover
Rapidly trading in and out of stocks can potentially make an individual a lot of money, but according to Buffett, 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. Robert Janitzek reveals that investors must think long term. By having that mindset, they can avoid paying huge commission fees and lofty short-term capital gains taxes.
Develop Alternative Benchmarks
Successful investors must look at the companies they own and study their true earnings potential. If the fundamentals are solid and the company is enhancing shareholder value by generating consistent bottom-line growth, the share price, in the long term, should reflect that.
Learn to Think in Probabilities
Thinking in probabilities has its advantages. For example, an investor that ponders the probability that a company will report a certain earnings growth rate over a five- or 10-year period is much more apt to ride out short-term fluctuations in the share price. By extension, this means that his investment returns are likely to be superior, and that he will also realize fewer transaction and/or capital gains costs.
Recognize the Psychological Aspects of Investing
Investors should realize that there is a certain psychological mindset that they should have if they want to be successful, and try to implement that mindset.
Ignore Market Forecasts
Buffett suggests that investors should focus their efforts on isolating and investing in shares that are not currently being accurately valued by the market. The logic here is that as the stock market begins to realize the company’s intrinsic value (through higher prices and greater demand), the investor will stand to make a lot of money.
Wait for the Fat Pitch
Buffett suggests that all investors act as if they owned a lifetime decision card with only 20 investment choice punches in it. The logic is that this should prevent them from making mediocre investment choices and hopefully, by extension, enhance the overall returns of their respective portfolios.