8 Ways to Think Warren Buffett Way
How to Think Like Warren Buffett In 1999, Robert G. Hagstrom wrote a book about legendary investor Warren Buffett called "Warren Buffett Portfolio".
What distinguishes this book from countless other books and articles about "The Oracle of Omaha" is that it offers the reader invaluable insight into how Buffett really thinks about investments. In other words, the book delves into the psychology and mindset that has enriched Mr. Buffett so much. While investors will see the benefit of reading the entire book, we selected one-shot samples from tips and suggestions on investor thinking and ways to get into Buffett's mind, as well as improve stock selection.
1. Stock Market Is A Business
Most investors think that stocks and stock markets are just pieces of paper that are traded between participants. This can help prevent them from being too emotional to any position. However, we cannot claim that it drives the best possible investment decisions.
That's why Buffett said that shareholders should see themselves as partial partners of the companies they invest in. Hagstrom and Buffett have argued that by thinking this way, investors will tend to avoid making decisions and focus on long-term results. However, long-term thinking investors analyze situations in more detail and take good care of them before making trading decisions. According to Hagstrom, taking care of thinking and analysis processes in this way also increases the rate of return from investments.
2. Increase Your Investments
While it almost never makes sense for investors to put all their eggs in one basket, it's not good to put all your eggs in too many different baskets than necessary. Buffett claims that an overdose of diversification will also reduce the rate of return. Therefore, he does not invest money in mutual funds. For this reason, he invests heavily in several companies.
According to Buffett, investors should do their homework before investing in any securities. However, they should be comfortable enough to invest some of their assets in the way they look after the research is carried out and completed with care. He also thinks that investors should feel comfortable cutting their portfolios and reducing the number until only a handful of companies are left with a good future.
Buffett backed his stance on spending time to distribute your funds manly by saying that the issue is not just the best company but what you think of that company. If your best company has the least financial risk and has the best sounding long-term opportunities, why invest your money in someone who is in the 20th place on your list rather than investing your money in this company?
3. Reduce Portfolio Conversion Speed
Buying and selling stocks quickly is likely to earn a person a lot of money, but according to Buffett, this person actually prevents their investment from earning. The high number of trading transactions increases both the amount of taxes paid on capital returns and the commission payable in that year.
According to the Oracle, whatever makes sense for your business, the same is for stock: an investor must show the determination and determination he would have if he owned a small share of a prominent business as a whole company.
Investors should think long term. This mindset will protect them from high commissions and high taxes. They will also be trained in dealing with short-term fluctuations in business and will ultimately eat the bread of increased earnings and dividends.
4. Get Alternative Benchmarks
Generally, stock prices are used as the cornerstone to measure the success of any investment, but Buffett's focus is not on this one. Instead, it prefers to analyze and examine the underlying economy of any one or a group of businesses. If a company is doing what it takes to grow profitably, the share price will already do its part and follow it.
Successful investors should look at the companies they own and work well on their true earning potential. If the company's key indicators are sound and the company is also improving the value of its shareholders with consistent growth, the share price will reflect this in the long run.
5. Think With Possibilities
Bridge is a card game where the best players use mathematical probabilities to beat their opponents. As expected, Buffett loves this game very much and plays actively enough to bring the strategies here into the investment world.
Buffett advises investors to look at the economic conditions of their companies and then try to predict the likelihood of certain events happening, like a bridge player trying to guess the cards of the opponent. He also added that an investor would be more accurate in predicting probabilities by focusing on the economic side of the equation rather than the stock price element.
There are a number of advantages to thinking with probabilities. For example; An investor who thinks about how much growth a company can achieve in a 5 or 10 year period will be better prepared to handle short-term fluctuations in share prices. Therefore, the return of this investor may be higher.
6. Understand Psychology
Simply put, individuals need to understand the existence of a certain mindset that is expected to be in successful investors. That is, the successful investor will focus on possibilities and economic issues while ensuring that decisions are made logically rather than emotionally.
Investors' own emotions can be their worst enemy. According to Buffett, the way to overcome emotions is to keep your belief in the basic indicators of the business firm and not to worry too much about the stock market.
Investors must realize that they have to have a certain mood if they want to be successful and try to reach that mindset.
7. Ignore Market Forecasts
As the old saying goes, the market is climbing a wall of worry. In other words, despite all the negativity floating around and those who constantly claim that recession is just around the corner, the markets have performed well so far. Hence, doomsday should not be taken into account.
On the other side of the coin, there are infinite optimists of the same number and intensity who claim that the market will rise forever. They are also people who should not be taken into account.
Amid all this confusion, Buffett advises investors to isolate the focus of their efforts and invest in stocks that are not yet properly priced in the market. The rationale here is that once the market realizes the true value of the company in question through more demand and higher prices, the investor will be able to earn big money.
8. Wait for the Right Opportunity
Hagstrom's book takes legendary baseball player Ted Williams as an example of a smart investor. Williams would wait where he knew there was a high probability of making contact with the ball for a particular shot. It is said that this discipline enabled Williams to stay on the field much longer than the average player.
Buffett also recommends that all investors pretend to have a card with only 20 lifetime investment opportunities. The rationale is to prevent them from making massive mediocre investment choices and to improve the overall return of their portfolio.
The book "Warren Buffett Portfolio" is a timeless work that offers valuable insights into the psychological and mental makeup of the legendary investor. Of course, if investing like Warren Buffett were as easy as reading a book, everyone would be rich. But if you spend some time and effort implementing some of Buffett's proven strategies, you will be taking an important step towards both improving your stock selection and increasing your returns.