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  • By Henrikh
  • 15 Oct 2021
  • 2 min read

Warren Buffett Investment Rules - Investing like Warren Buffett

We'll talk about Warren Buffett's investment rules, which made him billions of dollars.

 

Hi, I'm Henrikh. In this article, I'll describe what Warren Buffett has to say about each step of successful investing that I learned spending years. 

 

What is successful stock investing? It is when you buy a stock, wait for it to rise in price, sell it, and repeat the same process over and over again, with minimal mistakes. 

 

So there are four steps for successful investing:

  1. Buy low

  2. Wait

  3. Sell high

  4. Repeat with minimal mistakes

 

I know that I didn't say anything new to you, but let's see what Warren Buffett has to say about each step of that process.

 

So let's start with step #1: Buy Low

The main questions of this topic are what to buy and when to buy. To be successful in investing, you should see yourself as a business owner, and your approach should be buying businesses, not stocks. Your main target should be companies that are easy to understand, have a competitive advantage, and great management. 

 

Now, when we know what to buy, let's see how to understand when to buy a business. The main aim for value investors like Warren Buffett is to buy companies at a price that is way lower than its true intrinsic value. So we need to find the true intrinsic value and buy cheaper than that. Warren Buffett once said, "Be fearful when others are greedy and greedy when others are fearful." When others are greedy, prices boil over, and one should be careful not to overpay for an asset. And when others are fearful, and prices of great companies are dropping, it may be an excellent value buying opportunity.

 

Step #2: Wait

As Warren Buffett has stated, "Only buy something that you'd be perfectly happy to hold if the market shuts down for ten years." Buffett's partner Charlie Munger once said, "You don't make money when you buy, and you don't make money when you sell. You make money when you wait." So waiting is one of the most critical elements in investing, regardless if you are waiting for the price to rise to sell your shares, or you are waiting for the price to drop to add more shares to your portfolio. If you have trouble with waiting, forget about successful investing. Sometimes you should invest your energy in waiting to gain more success in the future. That's the rule of investing.

 

Step #3: Sell High

The main question is when to sell. Although successful investment is when you sell higher than what you paid for, that doesn't really mean that you always can do it. There can be times that many fundamental things are changed in the business after you bought it. In those cases, Warren Buffett sells his stocks as well. Like recently, it happened with the airline stocks. Warren Buffett has bought four major airlines, and after that, the global economy shut down, and Buffett thought that the usual ticket selling volume would not be the same in the future, and many airplanes will be parked for years. So he sold out all his shares taking significant losses because the fundamentals of the businesses had changed. The reason why he had bought the shares no longer existed.

 

So usually Warren Buffett sells his stocks in 2 cases. When business fundamentals are changed and when a stock is overpriced compared to its real value. As we all know, Warren Buffett once said, "Our favorite holding period is forever." So he doesn’t buy businesses to sell soon, he buys companies to build wealth in the long run. 

 

Step #4: Repeat the process with minimal mistakes
Nobody can avoid mistakes, and even Warren Buffett publicly said in his recent shareholder meeting that investing in airlines was his big mistake. So the main point is to make minimal mistakes. What is Warren Buffett's strategy for minimal mistakes? It's the margin of safety. Warren Buffett said, “The three most important words in investing are margin of safety.” That means paying less than what it's worth, a discount to the intrinsic value of a stock. And that's how he makes minimal mistakes. Warren Buffett is a firm believer in the margin of safety and has stated it as one of his "cornerstones of investing."

 

Another critical element to avoid mistakes is investing in your financial education. As Warren Buffett mentioned, "Risk comes from not knowing what you're doing." He spends hours of daily reading and has done so for most of his life. He firmly believes that the better educated you are the better equipped you'll be to make wise decisions and avoid unnecessary risks. And as Warren Buffett's partner, Charlie Munger, advised, "Go to bed smarter than when you woke up." 

 

What is left to do for long-term success? It's to repeat this cycle over and over again, but before repeating, you must educate yourself enough. As Warren Buffett said, "By far, the best investment you can make is in yourself.

 

We'll talk about Warren Buffett's investment rules, which made him billions of dollars.

 

Hi, I'm Henrikh. In this article, I'll describe what Warren Buffett has to say about each step of successful investing that I learned spending years. 

 

What is successful stock investing? It is when you buy a stock, wait for it to rise in price, sell it, and repeat the same process over and over again, with minimal mistakes. 

 

So there are four steps for successful investing:

  1. Buy low

  2. Wait

  3. Sell high

  4. Repeat with minimal mistakes

 

I know that I didn't say anything new to you, but let's see what Warren Buffett has to say about each step of that process.

 

So let's start with step #1: Buy Low

The main questions of this topic are what to buy and when to buy. To be successful in investing, you should see yourself as a business owner, and your approach should be buying businesses, not stocks. Your main target should be companies that are easy to understand, have a competitive advantage, and great management. 

 

Now, when we know what to buy, let's see how to understand when to buy a business. The main aim for value investors like Warren Buffett is to buy companies at a price that is way lower than its true intrinsic value. So we need to find the true intrinsic value and buy cheaper than that. Warren Buffett once said, "Be fearful when others are greedy and greedy when others are fearful." When others are greedy, prices boil over, and one should be careful not to overpay for an asset. And when others are fearful, and prices of great companies are dropping, it may be an excellent value buying opportunity.

 

Step #2: Wait

As Warren Buffett has stated, "Only buy something that you'd be perfectly happy to hold if the market shuts down for ten years." Buffett's partner Charlie Munger once said, "You don't make money when you buy, and you don't make money when you sell. You make money when you wait." So waiting is one of the most critical elements in investing, regardless if you are waiting for the price to rise to sell your shares, or you are waiting for the price to drop to add more shares to your portfolio. If you have trouble with waiting, forget about successful investing. Sometimes you should invest your energy in waiting to gain more success in the future. That's the rule of investing.

 

Step #3: Sell High

The main question is when to sell. Although successful investment is when you sell higher than what you paid for, that doesn't really mean that you always can do it. There can be times that many fundamental things are changed in the business after you bought it. In those cases, Warren Buffett sells his stocks as well. Like recently, it happened with the airline stocks. Warren Buffett has bought four major airlines, and after that, the global economy shut down, and Buffett thought that the usual ticket selling volume would not be the same in the future, and many airplanes will be parked for years. So he sold out all his shares taking significant losses because the fundamentals of the businesses had changed. The reason why he had bought the shares no longer existed.

 

So usually Warren Buffett sells his stocks in 2 cases. When business fundamentals are changed and when a stock is overpriced compared to its real value. As we all know, Warren Buffett once said, "Our favorite holding period is forever." So he doesn’t buy businesses to sell soon, he buys companies to build wealth in the long run. 

 

Step #4: Repeat the process with minimal mistakes
Nobody can avoid mistakes, and even Warren Buffett publicly said in his recent shareholder meeting that investing in airlines was his big mistake. So the main point is to make minimal mistakes. What is Warren Buffett's strategy for minimal mistakes? It's the margin of safety. Warren Buffett said, “The three most important words in investing are margin of safety.” That means paying less than what it's worth, a discount to the intrinsic value of a stock. And that's how he makes minimal mistakes. Warren Buffett is a firm believer in the margin of safety and has stated it as one of his "cornerstones of investing."

 

Another critical element to avoid mistakes is investing in your financial education. As Warren Buffett mentioned, "Risk comes from not knowing what you're doing." He spends hours of daily reading and has done so for most of his life. He firmly believes that the better educated you are the better equipped you'll be to make wise decisions and avoid unnecessary risks. And as Warren Buffett's partner, Charlie Munger, advised, "Go to bed smarter than when you woke up." 

 

What is left to do for long-term success? It's to repeat this cycle over and over again, but before repeating, you must educate yourself enough. As Warren Buffett said, "By far, the best investment you can make is in yourself.