Warren Buffett is one of the world’s most successful and natural value investors, but he’s had a lot to learn along the way.
While we at STRIDE don’t strictly follow all of Buffett’s methodology, differing in certain areas like diversification, we have great respect for the man that made investing wisely a life-time pursuit. That’s why we’ve taken time to consider all the “Buffettology” out there and compiled three tips from Warren Buffett to make up the most effective value investment strategy.
3 Tips on Value Investing
1. When Others Fear, You Have Opportunity
Buffett once said, “A climate of fear is [an investor’s] best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance”.
We’ve written before about various aspects of fear in investing, such as loss aversion, regret minimisation and envious investing. Unsurprisingly, unlike the turbulent reactions of wall street, our conclusions have always been to keep a calm head and avoid fear, which almost always leads to some kind of under or overreaction.
That’s not to say you shouldn’t be a cautious investor, but fear is another animal altogether and leads to rash decisions. Investing is and should remain a considered art of discernment, without using emotions to balance your decisions.
2. Understand Your Investments
3D value investing isn’t investing left up to chance, luck or fate. Instead, it’s a measured approach to investing, where you research precisely where you’re placing your money based on an understanding of the outcomes that you expect or want. Understand your investments.
Investment decisions should be based on clear metrics that help you to calculate the current and potential value of a stock, and these metrics are found by in-depth research into stocks that you’re interested in. If everyone is flocking to a wall street stock with high hopes of it sky-rocketing, but you can’t understand how this might be (based on your research), then steer clear.
Invest in what you know and trust.
3. Concentrate on Long-term Results
If you do find yourself in a sticky situation, you should have been guarding your emotions so that you’re always ready to walk away. However, your focus should be on long-term results.
Value investing, while always pertaining risk, is about your insight into the growth of a business, backed up by data. As most businesses don’t grow in value overnight (at least, most stable ones don’t), value investing calls you to stay with a stock for a decent amount of time. Generally, most value investors suggest at least three years, but obviously it is always stock-dependant.
So, the last tip of the day is to understand that you shouldn’t make your decision lightly and stick with it until your insight is realised (incidentally, this long-term nature of value investing is also one of the reasons why we at STRIDE like to diversify).
That’s our “Buffettology” all caught up for this month, and we hope that you agree that these are tips worth living by. If you have any questions for us about these tips, please just let us know via the live-chat in the bottom right corner of your screen.