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THE SOUTH AFRICAN INDEX INVESTOR |
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“Greater rewards, lower costs” |
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TOOL BOX |
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Investment Philosophies, Theories and Practices (continued…)
Warren Buffett’s Nine Keys to Investing
1. Know the numbers and what they mean
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 I.Q. beats the guy with the 130 I.Q. Rationality is essential.
“When managers want to get across the facts of the business to you, it can be done within the rules of accounting. Unfortunately, when they want to play games, it can be also be done within the rules of accounting. If you can’t recognize the differences, you shouldn’t be in the equity-picking business.”
2. Invest in products you understand
“When we invest in stocks, we invest in businesses. And yet, investing in a business is not running a business. Investing gives you this wide exposure that you just can’t get directly. As an investor you learn where the surprises are. You also learn capital allocation. Instead of putting water in just one bucket, you learn what other buckets have to offer.”
3. Read widely to value prospects
“Price is what you pay. Value is what you get.”
“…if you can buy into a business for less than it’s worth today, and you’re confident of the management, and you buy into a group of businesses like that, you’re going to make money.”
“Someone once asked him how he could discover the true value of a business when he was not in the business itself. ‘Do a lot of reading,’ Buffet advised his interrogator.”
4. Always maintain a margin of safety
“Rule Number 1: Never lose money. Rule Number 2: Never forget Rule Number 1.”
“Look at stock market fluctuations as your friend rather than your enemy – profit from folly rather than participate in it.”
“He [Benjamin Graham] said the three most important words of investing: ‘margin of safety.’ I think those ideas, one hundred years from now, will still be regarded as the cornerstones of sound investing.”
5. Become a fanatic about investment
“Investment must be one’s ruling passion if one is to become a successful investor, and what helps a person become so obsessed is not greed, but the fun of seeing the money grow over the years.”
6. Avoid buying “popular” stocks
“For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.”
7. The secret of compound interest
“Value investing is based on the compounding of interest. The secret is to keep the money where it is and let it work steadily toward the goal you have in mind. The good years don’t matter all that much; they cancel out the bad years that are bound to occur no matter what kind of gyrations the market is going through.”
“It’s really the interaction of capital employed, the return on that capital and the future capital generated versus the purchase price today.”
8. Know when to invest
“We have no idea how long the excesses will last, nor do we know what will change the attitudes of the government, lender, and buyer that fuel them. But we know that the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
9. Never run with the street pack
“Risk comes from not knowing what you are doing.”
“Never ask the barber if you need a haircut.”
“Full-time professionals in other fields bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers.”
Source: “Warren Buffett: Master of the Market” by Jay Steele, 1999. |
