Words Of Wisdom - Foundations of Warren Buffett Approach in NEW TO TRADING & INVESTMENTS? - ...
04-19-2011 04:04 PM
Foundations of Warren Buffett Approach
Warren Buffett lets companies inform him by their operating results, not by short-term stock market fluctuations. His is a very patient investment strategy based on the value of the business. Buffett’s whole approach is to look at a share purchase from the perspective of a business owner rather than as a stock market dabbler.
- There is a large difference between investing in a particular stock and trying to predict the direction of the general market. In spite of technology, it is still people that make markets. Investor sentiment has the largest influence over short-term market direction and stability. However, the long-term value of a stock is ultimately determined by the economic progress of the business, not the day-to-day market fluctuations.
- The Mr. Market Allegory.
Imagine you are the owner of a small business in partnership with Mr. Market. Every day, Mr. Market quotes you a price at which he is willing to buy your half of the business or sell you his half. While the business is sound and makes good progress, Mr. Market’s quotes vary widely according to the mood he is in. When he is in an upbeat mood, his price is exceptionally high. Conversely, strike him on a bad day and he is very pessimistic and quotes an unusually low price. If you were in business with Mr. Market and you tried to take advantage of his wisdom, you would be on an emotional roller coaster ride. Rather, it is Mr. Market’s pocketbook you should take advantage of, not his wisdom. It is disastrous if you fall under his influence. A successful stock market investor should put aside the emotional whirlwind Mr. Market unleashes on the general market every day and exercise sound business judgement.
- Investors must be financially and psychologically prepared to deal with the everyday market fluctuations. Unless you can watch the value of your stock holdings decline by 50-percent or more without becoming panic striken, you will never succeed.
- Price declines are a welcome way to add more shares to your portfolio at a lower price. As long as your are investing in a soundly run business with good fundamentals, management and prices, the market will eventually acknowledge success.
- The ability to say ‘‘no’’ unless all the facts are in your favour is a significant advantage for any stock market investor. Rather than constantly buying and selling shares in mediocre businesses on the strength of a rumour, Buffett buys and holds shares permanently in just a few outstanding, well-managed businesses. His approach is always to wait patiently until a truly great investment opportunity surfaces and then go to it.
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