Warren Buffett earned the title as the “world’s greatest investor” because of his investment strategy. It is a nickname that Buffett himself laughs at, but when you are worth $36 billion, it is hard to dispute.
Here are five ways the Oracle of Omaha was able to build such incredible wealth:
- Make a List of Criteria to Buy a Stock. A great example is, you could look for stocks within a certain industry and with a specific price to earnings ratio or 6 months moving average. Whatever metrics you use, just remember that stock price should not be your only criteria. Many times a good company will dip in price due to the market or sector. This does not mean the company is a bad one, just that the industry is pulling down the price. This could present a good buying opportunity as long as the criteria you establish are being met. Remember, Warren Buffett is a value investor. He acquires stocks that are unreasonably low based on their intrinsic value. He typically looks at the company’s performance, debt, and profit margins.
- Invest in Industries and Companies You Know. Understanding something about the industries or companies you invest in will make it easier to stay current on industry trends and company news. An investment strategy based on speculation, fads, or your friends’ stock tips is a recipe for failure. If you are interested in a company you do not know, but hear a lot about, research it first. If you can’t explain how the company makes money how can you be confident that it is worth investing in?
- Cash is King. If no companies on your list fit your investment criteria, stay in cash. Cash is a position and you are not going to lose significant money staying in cash. Wait for the perfect entry point. Do not jump the gun and buy when the company has peaked.
- Keep Tabs on the Companies You Invest in. Once you invest, follow the companies on a monthly basis. Do not look at them on a daily basis. That is just stressful. but keeping tabs on them will allow you to stay informed of any significant personnel changes, company structuring and strategies, and other significant changes that would affect the business.
- Sell When the Time is Right. When a company no longer matches your reasons for buying, sell the stock. This is what most Warren Buffett followers miss. He has rules and he diligently follows them. When a company no longer fits his criteria, he sells. Do not allow yourself to make excuses for staying in the investment. Sell it.