How Warren Buffett Invests: Part 2

By Dale Gillham | Published 28 May 2018

In Part 2 of this series on how Warren Buffett invests, he that you should... 

Part 1 of how Warren Buffett invests

3. Invest in yourself first 

"The best investment you can make is in your own abilities. Anything you can do to develop your own abilities or business is likely to be more productive."

Most people are not going to make most of their money from the stock market. They are going to make it from their careers. So put yourself first.

Once again, I agree with Buffett as many desire to be successful at investing or trading, only to not put in the required effort to learn properly and then apply what they have learnt.

To be successful, you need to put yourself first and this means learn how to invest and then do it. If you do not learn properly, how can you trust yourself to be a successful investor or trader, it just does not make logical sense.

Buffett says, that the hardest thing is to trust your investment decisions. You always think that others are right and you are wrong. Instead, you need to study and believe in yourself.

To be successful, you need to overcome the fear and not pay attention to what others are telling you. Accumulate knowledge and make investment decisions on your own to stand separate from the crown and be a winner.

In my experience the majority do the opposite of what Buffett is saying, in that they make themselves dependant on others such as brokers, stock reports and recommendations to name a few. Remember, knowledge overcomes fear.

Fear of failure or fear of being wrong can all be overcome through by acquiring the correct knowledge.

If you are reliant on others to tell you what to do or what to invest in, then you will subject yourself to emotional decision making and this is not the most effective way to gain success in the markets.

4. Buy quality companies

Buffet believes in quality investing and who could argue with that. 

He would rather pay a fair price for a great company than a low price for a mediocre company.

In my book, Accelerate Your Wealth - It's Your Money, Your Choice, I talk about buying cheap, given that all too often people buy stocks that they perceive to be cheap in price, however, what they are really buying in most cases is a stock at a low price that has even less value.

To paraphrase a quote: "Price is what you pay. Value is what you get."

There are two principles behind this: firstly, if you buy a stock for less than it's true value, the stock's price will eventually converge with it's intrinsic value; and secondly, if you buy a wonderful business, the value of that business will compound and increase exponentially the longer you hold on to it. 

So, the patient investor will ultimately be rewarded if they hold on to their stocks for a longer time. For Buffett, time is the friend of a wonderful business.

Stocks are continually rising and falling in price and there are many things that might cause this but it all boils down to our perception of what the real value of the stock is. 

Different people place different values on the same stock and this is why the market works so well. It is also why I use technical analysis combined with value investing techniques to determine what I buy and sell along with when I buy and sell.

That brings us to the end of the Part 2 of how Warren Buffet invests. 

Next week I will continue with more of Buffets insights. 

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