Three Rules: This is how Warren Buffett Invests
The corona virus, good quarterly figures or simply a comment at Reddit: There are an infinite number of reasons to buy shares of a particular company. And one thing is certain: those who invest want above all a good return. But you shouldn’t buy just because you think the price will go up, according to Berkshire Hathaway CEO Warren Buffett.
Numerous statistics prove it again and again: Timing the market usually goes wrong. Even the best investors cannot predict how a market will develop.
Buffett recommends paying particular attention to two points when investing in stocks: Only invest in companies that you understand AND that have great long-term potential.
Every investor should be able to put on paper his argumentation why he buys a share of a company. Buffett explained this in an interview with Becky Quick on CNBC’s “Squawk Box”.
Nobody should be distracted by short-term price fluctuations either. It is no secret that Buffett is always looking for long-term investments. I can only emphasize that: Cause of the Corona Virus many companies are relatively cheap, especially companies that have something to do with travel, such as airlines. This may could make for very good deals long term (I will write about this in more detail in another article.)
Buffett buys according to these three rules
In order to make a general decision on which companies to invest in, Buffett looks at three criteria, as he writes in his recent letter to Berkshire shareholders: “First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”
Important: Equities may or may not beat the market. And results from the past cannot predict figures for the future — they only can provide guidance.
A good alternative to individual stocks are index funds, for example on the global economy or the S&P 500 — which had a sensational year last year with a good 29 percent return. The normal return is around 8 percent, which is still great.
Sources:
https://www.youtube.com/watch?v=JvEas_zZ4fM
https://www.cnbc.com/2019/06/20/how-warren-buffett-decides-what-to-invest-in.html
https://www.berkshirehathaway.com/letters/2019ltr.pdf