This post today is in response to an article I found over at Motley Fool that talked about 4 of the top investing tips Warren Buffett has infused our brains with over time. I thought this would be a great post to do an article on as it highlights both the similarities and the differences between beginner/intermediate investors, and someone with as much cash and equity as a man like Warren Buffett has.
Tip 1: Cash is king
The point in this tip is that while investing and being in the market is very important, it is also imperative that we keep enough “dry powder” on the sidelines to be able to take advantage of economic downturns.
The similarity we can share with a larger investor is that it’s always a good idea to sit down and assess the size of your portfolio you’d like to keep in cash reserves for those down times that will some day come – and remember there won’t be time to prep for it, once a crash comes it’s too late to start planning for it. For us, we’d like to keep about 10% in cash that is completely aside from anything rainy day fund related that we would feel confident piling into the stock market should things go sour.
The main difference in this tip is that when people take a look and see BILLIONS of unused capital in Buffett’s portfolio they immediately make statements along the lines of “he knows a crash is coming so he’s staying in cash” which simply isn’t true. Buffett has tens of millions of dollars streaming in steadily in dividends alone from his holdings, to a point that he himself has claimed he has a difficult time spending it all now.
So, it’s not that he necessarily see’s a crash coming our way in the near future but more has to do with the fact that there just aren’t as many good deals to be had these days as there have been at other points in history.
Tip 2: Trust the process
This point targets the fact that while nearly everyone has been making great returns for this past decade, there is potential that some of those people have simply been lucky and riding the tides as they go up and valuations go crazy on certain companies and sectors while others have a more sustainable and strategic approach to investing that will likely stand up better over time.
Buffett’s portfolio is typically considered amongst the “conservative” class and yet he is arguably the most successful investor in the history of the stock market – just some food for thought for our readers. Sometimes having patience and a sound game plan is all you need.
Tip 3: Stay long
Imagine buying a company like Coca-Cola and getting paid a yield on cost of 100%! That’s along the lines of what Warren Buffett managed to achieve. Warren first bought Coca-Cola in 1988 and to date is believed to be up nearly 2,000% in capital appreciation. If you fast forward to 2019, Berkshire now owns nearly 21 billion in KO stock and anticipates receiving nearly 650 million dollars in dividends alone in the coming year.
While we may never see numbers that high, it really validates our method of dividend growth investing and picking stocks we believe to be long term hold opportunities over the trendy stocks that may come up in more headlines – in the short term.
Tip 4: Do the work!
This one is the real take away here, it’s not luck or coincidence that Mr. Buffett has reached the levels he has. When you read books, articles and interviews about the man it is clear that from a young age he had the mind for his chosen field. It’s taken him decades and decades of repeating the same habit of reading company financial statements and coming up with his own assessments of the value of that company before being able to determine if the ask price is worth what he’s receiving in return.
Our best piece of advice here is to just get started, pick a few main criteria to filter companies by, narrow down your potential buys and really take a good look at their balance sheets and cash flow statements along with reading up on quarterly releases and headlines to see if you can come up with which one best suits your needs. Once you’ve done that make the purchase feeling more informed and confident with your decision. Over time, all investors will lose money on some purchase – but you should also gain valuable experience to make even better choices in the future.
This is, of course if you’re someone with an interest in the stock market and picking individual stocks. If you’re not into the time and effort, or just aren’t interested in doing it yourself then of course find a more passive way to invest like ETF’s or mutual funds.
Wrap Up
Thanks for stopping by to read our thoughts on this topic. We personally love reading the articles over at Motley Fool, so if you don’t already (which, if you’re reading this you likely already do) read their stuff frequently definitely make it a stop on your rounds for finance and stock market related news.
Questions? Comments? Feel free to leave them below or over on our Instagram @FindependenceCanada and we’ll be sure to get back to you.
FIC.