Warren Buffett is legendary investors looked up to by any given investor because of his success in investing. More than that, Buffett is also known for the wise advice he often gives to investors who want to follow his steps.
Treat Stocks like Business
Many investors think about stocks and the market in general as simply the trading of pieces of paper. This may help investors become less emotional when it comes to investing, but this kind of mindset does not necessarily let you make the best possible investment decisions.
For Warren Buffett, stockholders should think of themselves as “part owners” of the business in which they are investing their money.
Adopting this kind of mindset will let you avoid the off-the-cuff investment decisions and you will become more focused on the longer term. Moreover, longer-term ‘owners’ tend to analyze their situation in great details. That means they will also put a great deal of thought into buy and sell decisions.
Increase the Investment Size
Although we all know that putting all your eggs in one basket is not a good thing for investments, putting them in too many different baskets also may not be that great.
For Buffett, over-diversification can also strain your returns as much as the lack of diversification. This is the reason he doesn’t invest in mutual funds and he makes significant investments in only a number of companies.
He advises investors to do their homework first before deciding to invest in a particular security. After the due diligence, the investor should feel more comfortable in winnowing down their portfolio to a bunch of good companies that have excellent growth prospects.
Lower Portfolio Turnover
Quickly trading in and out of stocks can significantly give you the chance to earn a lot of money. However, for Buffett, this way of trading can actually hamper your investment returns.
The reason behind this is because portfolio turnover increases the amount of taxes that must be paid on capital gains and improves the total amount of commission dollars that have to be paid in a given year.
For Buffett, the investors should think of the longer-term. With this kind of mindset, they can actually avoid paying huge commission fees and short-term capital gains taxes. They will also be better suited to overcome any short-term fluctuations in the business.
Find Alternative Benchmarks
Even though prices may be the ultimate barometer of success or failure of a investment choice, the “Oracle” doesn’t focus on this metric.
Rather than doing that, Buffett analyzes and scrutinizes the underlying economics of a given business or group of businesses. Provided the company is doing it what it needs to do to be profitable, the share price will take care of itself.
Think of the Psychological Aspects
In a nutshell, an investor must remember that there is a psychological mindset that successful investors tend to adopt. To be specific, the investor should focus on probabilities and economic issues while letting decisions be ruled by rational thinking instead of the emotions.
Emotions can be an investor’s worst enemy. Buffett tells us that the best way to overcome emotions is to be able to retain your belief in the real fundamentals of the business and be able to not care about the stock market.
