The Warren Buffett Way of Investing

Jul 5, 2022

Stock101

Warren Buffett, often referred to as the greatest investor of all time, is a widely referenced icon in the investing world. Every stock market investor hopes to one day attain the feat he has reached or, better still, come close to it.

However, Warren Buffett’s success did not happen out of sheer luck or overnight. There are certain principles he applies to his everyday life, which affects his investment decisions. Although he has shared these “secrets” in many of his books on stocks and in countless interviews, we will briefly discuss the Warren Buffett Way in this article.

Without further ado, here are some principles you must apply to win in the stock market.

Knowing the Difference: Volatility Vs. Risk

Most times, some investors mix up one for the other. In reality, they are two entirely different concepts. Volatility is best described as how quickly a stock price changes within a defined time frame, whereas risk has to do with the likelihood of investment amounting to a loss.

Volatility has more to do with the price perception of a stock rather than its value. A stock can have a fixed value and, at the same time, be volatile. In contrast, a stock that has high volatility may be a risky investment. To reduce risk, buy a high-quality company that has a solid moat.

The Psychology of the Warren Buffett Way

Picking a high-quality business stock and the ability to evaluate it alongside a good investment strategy are some skills required to be a good investor. However, an important and widely overlooked element of the required long-term is the investor’s positive psychology and mindset.

Understanding market psychology gives investors a disciplined mindset that helps them focus during times of fear and uncertainties in the market. A good investor must be a master of their emotions and not take decisions borne out of greed or the fear of missing out.

Journal your Decision

As good as having a solid strategy is, the ability to journal decisions and reassess is even more paramount. Journaling your decisions and progress helps you consider your investment strategies, profits, and loss. It also helps to identify your strong points and keep a close tab on the areas that require readjustments.

Think in Decades

Warren Buffet once said in a letter to his shareholders, “if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

No matter how undiversified your stock portfolio is, the principle of long-term investing cuts across all spheres. Investing short-term can be likened to gambling. Therefore, a good investor thinks in decades. In the US stock market, the longer you hold a good stock, the better your chances of profiting.

Essentially, the stock market is a device for transferring money from the impatient to the patient.

Study Businesses

Another major part of the Warren Buffett way is to study the business. Before buying a company, one must study two key areas: quality and price. The quality of a business depends on how well it’s performing financially and its prospects. This may require you to review their financial records, study the management pattern and attend shareholder’s meetings. A business’s quality should lead to its stock price evaluation. High-quality stocks trading lower than their historical average may be a good bargain.

Hear the News, Avoid the Noise

There is noise constantly surrounding market trends and movements, some of which lead to false negatives. These market noises often focus on small daily movements and volatility, which are insignificant in the long run. When you study a company’s chart for five years, you will only observe the impactful movement rather than the small daily market volatility.

Overly fixating on market noise can lead to panic, resulting in short-term thinking and shifting your focus from the big picture. A good investor must be disciplined to filter out the noise and listen to the news for big events and changes that might affect an investment long-term.