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Suppose you want to invest in stocks to earn money. Then you need to know some rules of investing that big investor follow every day. The name Warren Buffet has now become synonymous with stock investment. He is the perfect person to follow if you want the best advice related to investing in stocks.
In this article, you will learn about some of the best rules that Warren Buffet follows to the heart. By following these rules of investing, he became one of the most famous investors in the world. The CEO of Berkshire Hathaway recommends these tips for becoming a successful investor.
Understand the Business Behind the Stocks
The first tip that Warren Buffet recommends is to understand the stock market. Gaining prior knowledge of the stock market is essential to earning lots of money. A common mistake that rookie investors make is buying the stock at low prices and selling them at higher prices.
While this practice might seem sound at first, buying long-term stocks is the safest and most profitable way of earning money. Warren Buffet stated that “only buy stocks that you are happy to hold even if the market shut down for ten years.”
The main reason why he has stated this is because of the concept of value appreciation and dividends. If you want to invest, look out for companies with a high RoCE (Return on Capital Employed). The more profits a company can get from invested capital, the more profitable their stocks will be for you.
According to the Oracle of Omaha, holding stocks for a long time is better than investing in short-term trades. He has stated that “our holding period is forever.” This defines the main difference between a trader and an investor. Traders buy and sell stocks within a short period, while investors are in it for the long run. We discuss related Rules Of Investing in detail.
Holding stocks will ensure that you earn a steady supply of dividends on returns. The better the company performs, the more money you will receive too. Therefore, always invest in stocks to hold them for a long time.
Practice value investing
In the words of Warren Buffet, value investing is the safest method of funding since the chances of facing losses are minimal. He stated that “it’s better to buy a wonderful company at a fair price than buying a fair company at a wonderful price.” You must do your research to understand the value of a company and know its profitability.
Therefore, you should only invest in companies with a good track record and high RoCE. Warren Buffett has suggested investing in blue-chip stocks – stocks of profitable companies. By combining these withholding stocks for a longer time, you will have no problem steadily earning good money.
Another rule of investing is to invest in undervalued stocks. This is another angle from which you can see the market. This is important as the most prominent companies have high stock prices, which commoners cannot afford to invest in. Therefore, buying undervalued stocks that yield quicker returns can also be a Plan B for many investors.
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Estimate the Value of Stocks
We all know the phrase “never judge a book by its cover.” This holds true in the stock market as well. Whenever you buy the stocks of a particular company, always try to study the inner workings and management of the firm. The better managers a company has, the better it is expected to perform financially.
The value of a company can be understood by four factors – nature of business, the performance of its management, valuation of stocks, and financial health. Understanding these company factors will provide a bigger picture of the company that can help you greatly in your decision-making.
It is also vital for you to measure a company’s intrinsic value. This refers to the actual value of an individual stock. This price is mainly inflated in the stock market as a general practice. Measuring the intrinsic value of a stock will significantly help you unravel the bigger picture of a firm’s financial performance and profitability.
Do Not Gamble
Since money is involved in stock market investments, many people often get too greedy. This leads to hasty investment in stocks without proper research. Just the prospect of earning big chunks of money from investments often leads to the poorest decisions by investors.
Gambling on stocks has led to many investors suffering huge losses. Unfortunately, this has become very common in intraday trading, where you buy and sell the stocks on the same day to earn quick money. While hasty trades might often hit the jackpot, they mostly lead to outcomes you will not want.
As a rule of investing, taking the time to make long-term investments is the key to success. Since a more significant amount of money is invested and held for a longer time, it is best to take the time and do your research before purchasing stocks. This will mostly lead to returns that are bound to put a smile on your face.
Never Invest with Borrowed Money
The final golden rule of investing by Warren Buffet is to never invest with someone else’s money. While borrowing money as loans for starting a business, buying a house, or for your education is acceptable, the same is not valid for stocks. Only invest if you have the money required already.
People often borrow money as loans from banks and make investments. This is quite risky as there are chances of making a bad investment, especially if you are new to investing. To minimize the losses and the opportunities to suffer a breakdown, never take loans for making investments.
Warren Buffet has stated that “never lose money.” He refers to the fact that even though you borrowed money to make investments, you will eventually have to give a portion of it back to the bank. Since dividends from stocks come to you steadily over time, returning the money will become a big hassle for you.
One should never take investments lightly since a lot of money is involved. So follow these six golden rules of investing by Warren Buffet to make the best investments at the correct time. Who knows when you might become the next Warren Buffet!