As the New Year has kicked off on a positive note with market indices touching all time highs, most investors are curious to explore investing opportunities from their closed ones and acquaintances, while some try to make sense of the volatility of what Benjamin Graham referred to as ‘Mr market’.
Learning the tricks of the trade may be a far-fetched goal for most, but making money, in fact, calls for learning merely the basics – assert some of the doyens such as Warren Buffett.
He once said, “It’s amazing how hard people make what is a simple game. But of course, if they told everybody what a simple game it was, 90 percent of the income of the people that were speaking would disappear.”
So, let us understand what key investing tips the Oracle of Omaha has given to the investors.
These are the six key investing lessons to learn this year from Warren Buffett.
Focus on the forest, forget the trees: In 2018 letter to shareholders, he wrote that investors should focus on the forest of (in reference to a corporate group) instead of the details of many and diverse businesses the group may be running. If the group is fine, there is no need to evaluate each tree individually to evaluate the future potential of your investment.
Focus on earnings not adjusted earnings: He pointed out that some companies feature ‘adjusted EBITDA’ in their presentations instead of ‘EBITDA’ to exclude a variety of costs.
For example, managers sometimes assert that their company’s stock-based compensation should not be counted as an expense. On this, he quotes Abraham Lincoln to say: “If you call a dog’s tail a leg, how many legs does it have? Four because calling a tail does not make it one,” he wrote in the letter to shareholders in 2018.
Being cash rich keeps you safe and secure: He spoke about having plenty of cash to face any contingency in future. He mentioned that his company Berkshire holds a massive amount of treasury bills and other cash equivalents.
“We consider a portion of that stash to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities,” he wrote.
Importance of retained earnings: Buffett, in his 2019 letter to shareholders, quoted Edgar Lawrence Smith’s 1924 book ‘Common Stocks as Long Term Investments’ which was reviewed by John Maynard Keynes who wrote that well-managed industrial companies do not distribute to the shareholders the whole of their earned profits.
In good years, they retain a part of their profits and put them back into the business. There is an element of compound interest operating in favour of a sound industrial investment.
Buffett wrote it’s difficult to understand why retained earnings were unappreciated by investors before Smith’s book.
Risk evaluation: He also wrote, in the letter in 2019, about disciplined risk evaluation which is the daily focus of his company’s insurance managers. “At Berkshire it is a religion, Old Testament Style,” he wrote.
Don’t invest for the sake of it: He once mentioned that his company has cash and cash equivalents of $144 billion because there were no good investing opportunities available in the market to deploy capital. So, the investors who have money to invest should not just do it for the sake of it until they have got an opportunity.
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