The Finance Blogger


Warren Buffets Financial Rules

Warren Buffets Financial RulesIn a recent letter to his shareholders, Warren Buffet shared the following advice. We took the headlines and added our own thoughts on this advice based on our own experience and feelings. This is based on our experience as a small time successful investor. We are not suggesting that we are smarter or have more experience than Warren Buffet. We are building on his experience. This post tries to add some value to his expert advice based on our own experience. As the picture shows, you should never lose money. But then again, not everyone is willing to put the effort into investing that Warren Buffet does. Treat investing as if it is your job and that your livelihood and retirement depends on it which it does.

Warren Buffets Financial Rules

  • Treat your investments like a business
  • Stocks are Inflation Protection over the long term
  • Volatility is not risk, it must be managed – short term vs. long term
  • Focus on multi decade horizons
  • Watch the fees from transactions and management fees

Treat your investments like a business – you may feel that you are a small investor with too small an investment to really matter in the big scheme of things. You may feel that your vote does not count for much. While on a percentage basis this is true, it is your money that you are  investing and your investment should meet your business goals for investing. Long term investments that pay regular dividends in a company that has long term prospects and is well managed are just a few of the business issues that investors need to consider.

Stocks are Inflation Protection over the long term – compared to GIC’s, bonds and other fixed interest rate return types of investments. Consider that bonds are paying a very low percentage interest income at this time, while inflation is also low. In fact once you take into account your tax situation on the income and inflation you are probably losing money if you are invested in fixed income securities. Sure there is risk with stocks, but well managed companies with dividend income have a tendency to do better than the inflation rate!

Volatility is not risk, it must be managed – short term vs. long term – many investors are worried about volatility. It is only an issue if you sell when the stocks are declining. Invest for the long term and ride the wave. It will be volatile but the trend is usually generally up ward as many stock charts will show. If you will need the money in the short term and cannot afford to lose any funds, you probably should stay away from any volatile investments.

Focus on multi decade horizons – start investing early in your life, focus on companies that you understand and have long term prospects. Focus on companies that are well managed, that pay regular dividends and have a history of increasing their dividends on a regular basis. Look for companies that paid their dividends during economic down turns.

Watch the fees from transactions and management fees – if you trade often, the fees will add up over time and cost you a good deal of money. The same applies to management fees for managing mutual funds or for managing your portfolio. Pay for value and pay for results.

Warren Buffets Financial Rules are part of a larger strategy that each investor should consider and personalize for their situation.

 

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