Billionaire and investment guru Warren Buffett offered some sound advice for investors on his 87th birthday: experience is the key to success. But what if you’re new to investing?
Beginners can take advice from other successful investors to avoid making costly mistakes. Here are some beginner investing tips from Buffett.
Only Invest in Things That You Understand
Buffett is a vehement believer in this motto: only invest in things that you understand. He warns that beginners – or even experienced – investors should never invest in businesses they don’t fully understand.
If it takes more than 10 minutes to understand how a business makes money and the main drivers that affect its industry, he moves on to another company.
If the business is too complex for you to understand, move on to another company.
Diversification Isn’t Always a Good Idea
Diversification is one concept that’s been drilled into every investors’ mind, but Buffett says this approach isn’t always a good idea.
He says diversification is for people who don’t know very much about investing. Experienced investors will choose stocks to invest in the long-term and should have faith in those investments.
Diversification may reduce the risk of volatility, but it makes it more difficult to keep track of individual companies and the events that affect their performances.
Be in it for the Long Haul
Buffett believes that the key to getting a better return on your investment is to buy a stock and hold on to it for the long-term. In fact, he insists on holding stocks for decades.
The constant buying and selling of stocks will take away from your returns in the form of taxes and commissions. For this reason, Buffett advises against day trading, which includes CFDs and forex trading.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes,” Buffett has said.
Invest in Yourself First
“The best investment you can make is in your own abilities,” says Buffett. He notes that most people will make most of their money from their careers – not the stock market.
Take an hour each day to better yourself. It can only make you a better investor and hopefully, better at your career.
Let Mistakes be Your Teachers
Even when following the advice of experienced investors, beginners are bound to make mistakes. Yes, even Warren Buffett makes mistakes. But the difference is that he learns from his errors and moves on.
Some people make a mistake and dwell on it or allow fear to drive their decisions. Buffett suggests keeping record of your mistakes so that you can understand what went wrong and avoid making that mistake again in the future.
Be Smart about the News You Follow
Don’t put too much stock into every news headline you see. Overreacting to a bad headline can cause you to sell stock before you really need to.
Buffett says he’s a believer in the 99-1 rule. Investors typically take actions based on the 1% of financial news they read.
It’s important to look at the bigger picture. If a company has been in business for more than 50 years, it can probably withstand a 10% drop in revenue in a single quarter.