Everyone in this world invests in some sort of security to get higher returns and maximize their wealth. The stock market is one of the most treasured places to invest capital. Let’s have a look at some prominent ways of stock investing and, of course, how Warren Buffett has invested over the past decades.
The best thing about investing strategies is that they are flexible. If an investor chooses one and it does not suit their risk tolerance or schedule, they can certainly make changes. But doing so can be costly. Every purchase carries a fee. Selling assets can create a realized capital gain. These gains are taxable and, therefore, expensive. So, you need to be careful about it.
Before you commit your money, you need to answer the question, what type of investor you are?
When you will open an account at any brokerage firm, you will be asked about your investment goals. Certainly, the brokers will ask if you are a risk-taker or risk-averse. And, if you are a risk-taker, how much risk you’re willing to take on.
“A key rule of thumb to keep in mind with any stock market strategy: Don’t invest cash you’ll need within five years.”
Some investors want to take an active hand in managing their money’s growth, and some prefer to “set it and forget it”. If you are new, you must stay active and learn the art of investing and somewhat trading as well.
Warren Buffett is a modern time great and an inspiration to many of us when it is about distributing your capital in the stock market and maximizing your wealth. Before reaching out on Buffet’s ‘buy and hold investing strategy, it is important to introduce the father of value investing himself, Benjamin Graham.
Graham, a British-born American economist, professor, and investor, was one of the first people to use financial analysis to Stock investing, doing it successfully. Graham first shared in his 1949 version of “The Intelligent Investor.” Investors are still using his strategies as of today.
Before jumping into the investing strategies of Benjamin, let’s give a brief introduction to who Benjamin Graham was and what led to his five common stock investing formulas.
Graham addresses the specific quandary every active investor will face in determining how to manage his or her portfolio, saying:
“Whether the investor should attempt to buy low and sell high, or whether he should be content to hold sound securities through thick and thin—subject only to the periodic examination of their intrinsic merits—is one of the several choices of policy which the individual must make for himself. Here temperament and the personal situation may well be the determining factors.”
What Graham was trying to say is that your emotional capacity and how you react to a certain situation play a key role in your investment. The key to this is ‘stay patient.
Benjamin Graham’s common stock investing strategies:
Beginning with Graham’s five categories of common stock investing strategies, that explains how it can conceivably result in better-than-average returns.
General Trading: General trading involves anticipating the market moves as a whole, following the basic trends as reflected in the familiar averages. This investment strategy goes in line with dollar-cost averaging. Using this method, you will spread out investment purchases to minimize market volatility and ensure you do not put a high percentage of money when the stock prices are unreasonably high or we can stay the stock fundamentals are overstated.
Selective Trading: Selective trading means you will categories the sectors, then watch out for the best performing or growing sector in the long term, and then further choose the best stocks in the market over a period of a year or less.
Buying Cheap and Selling Dear: For a beginner, you need to understand that buying during the pump will end you in losses and you would panic sell your stocks. Investors are infamously irrational, which explains why inexperienced investors buy while prices are rising and sell while prices are dropping. Focus on ‘buying the dip’, and in the long run, it would be beneficial. That’s what value investors do.
Do you want to become a value investor and see your holdings increase in the long run? Yes, everyone wants that. So, what you need to do is enter the market and purchase investments when prices are low and sell when the prices are high. And, avoid the pitfalls that come along with acting based on a stock’s fluctuating price.
Long-Pull Selection: Long-pull selections mean you pick out those companies or stocks that have high potential in the longer run, which are often referred to as growth stocks. These stocks belong to emerging sectors. Cannabis stocks and EV stocks are big examples of long-pull selections.
Bargain Purchases: The bargain purchases technique is selecting those shares in the market that are being sold considerably below their true value, which is measured by reasonably dependable techniques. One of the common methods to evaluate if a stock is undervalued or overvalued is its price-to-earnings (P/E) ratio.
So far, we have come across Benjamin Graham’s value investing techniques and now let’s get insights into Buffet’s investing strategy.
Warren Buffett’s way of Investing
Warren Buffett, one of the most decorated investors of this generation, follows the Benjamin Graham school of value investing, which looks for securities whose prices are unjustifiably low based on their intrinsic worth.
This means that Buffet focuses on the actual worth of the stock and bets on it for the long-term by holding the stock rather than focusing on supply and demand intricacies of the stock market.
Warren looks at companies. This is a simple yet effective way of investing and that has made him a billionaire and one of the richest persons in the world. Buffett also teaches young investors how to financially educate themselves and work on building positive money habits and breaking those that hurt your wallet.
The first fundamental from Warren’s book is to stick with long-term value investing strategies—Graham’s value investing strategies. Invest in what you understand. This means never invest in something you do not have enough knowledge about.
Buffet only invests in companies he understands and believes have stable or predictable products for the next 10—15 years.
Prefer those companies with competitive advantages, such as companies with pricing power, strategic assets, powerful brands, or other competitive advantages. This means the companies with the ability to outperform in good and challenging times. This is key to understand when investing in the long term. An investor must know that the company would survive bad times as well.
Another key aspect of Warren’s investing policy is to require a margin of safety. If you purchase shares of a stock with a margin of safety below its intrinsic value, this will reduce risk and provide an allowance for unpredictable events.
Last but not least is to be patient and think rationally while investing. And this is very important for a beginner to understand. Buffet is a long-term value investor, as he understands the power of exponential growth.
Warren Buffett’s golden words say that always invest in yourself.
“Invest in as much of yourself as you can. You are your own biggest asset by far.”