Warren Buffett is worth $72.5 billion US dollars. That is close to 4.75 lakh Crores.
So the obvious question on everybody’s mind: how did he do it?
Sometimes, we tend to overthink questions. Most would try to answer that question by looking at what types of stocks he purchased in the past and trying to figure out why he made those purchases (his investing philosophy, by the way, is called Value Investing).
But here, we’re going to do something different. We’re going to look at 3 quotes of Mr. Buffett and see if we can decipher a deeper meaning into his investing philosophy.
“Risk comes from not knowing what you’re doing.”
At first glance, that seems obvious. Of course that’s what risk is!
But how many times have you purchased shares (or F&O or any other transaction) without really knowing what you’re buying?
Here’s a quick test. If you own shares of any company, can you name its Price to Earnings ratio without looking it up? Do you know how long the company has been in operations? Do you know it’s future growth plans? What about its promoters and their backgrounds?
The same applies to F&O. When you buy a Nifty Call Option, do you really know what a Nifty Call Option is? If you answered yes, could you explain to a complete stranger what a Nifty Call Option is without confusing them?
And that is why there is so much more behind Mr. Buffett’s words than what meets the eye.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
This is such a great quote. At first glance, one might think that Buffett was merely talking about a person; but a person of significance is probably involved in business, and so Buffett is really talking about how a business might steadiliy go up in value for decades and plummet within a day (think Satyam).
What’s interesting about this quote is that it directly goes hand in hand with risk/reward ratios in investments. If you purchase shares of any stock, there is limited upside potential. Even if the stock goes up 300% from Rs. 50 to Rs. 150, the reality is that the stock price can fall. But if the stock price falls, it can fall to zero. In other words, the downside risk is limitless.
This is the most important aspect of risk management. This is especially true with Options as expiry approaches and time decay kicks in. Options become worthless and if you are on the wrong side of the trade, your entire portfolio can be wiped out overnight.
That is why it’s so important to understand proper risk management. Visit Trade Academy to sharpen your knowledge of Options and proper risk management.
“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
If you’re reading this, you should stop, write down that quote, and paste it on your fridge/wall/anywhere in your house!
This is the single most important quote of all time.
When you think about it, human beings are either greedy or fearful. The market is made up individuals; therefore, the markets are always in a greedy mode or in a fearful mode.
The dilemma is that you can never predict when the markets will be greedy or fearful.
That is exactly why this quote is pure genius. When the markets are irrationally going up, Buffett stays out. When the markets are fearful and take a beating, Buffett goes on a shopping spree and buys companies left and right.
This is almost a complete contradiction to what most market gurus say! “Ride the wave”. “The trend is your friend”. The list goes on and on.
But Buffett is fundamentally stating that the markets are unpredictable; therefore, instead of trying to predict the markets, look out when the the markets are in a super euphoric mood- it might be a sign to stay out of the markets. At some point in time, the markets will fall; that is when you should strike and take advantage of those who are dumping their shares due to fear.
And so there you have it. In a nutshell, Warren Buffett was able to amass his wealth by following three simple rules:
- Before buying anything, know exactly what it is you are buying. Otherwise, you are just risking your money.
- Understand risk management. The easiest way to understand it is by understanding that what takes years to build can be lost within a blink of an eye if you do not understand how risk management works.
- Buy when the market is fearful, and sell when the market is greedy. You cannot predict the market, but you can tell if the market is being greedy or fearful. Look to do the opposite.
And there you have it. The Oracle of Omaha’s secret to his success.
Happy investing and trading!