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Can Small Investors
Follow along with Warren Buffett
Warren Buffett is the world's most successful
investor. His investment strategy works marvelously
well - for Warren Buffett. In our experience, many
small investors lose money trying to follow in
Buffett's footsteps.
Buffett works with a list of companies whose stock he
would like to own. He monitors these companies and
their management teams. He is prepared to wait years
for an opportunity to buy these stocks at the right
price. If a stock never reaches his target price,
Warren does not buy it - no matter how much he likes
the look of it. If a stock reaches his target price,
he buys big. Then he waits. This is the
"classic" and best-known Buffett investment
method. (He has several.)
Over time, his stock buying decisions have been amply
rewarded.
So how does Warren Buffett identify the stocks he
would like to own? Firstly he selects the stocks of
companies with a uniquely competitive market position.
Often the competitiveness arises through the strength
of a brand name such as Coca-Cola or Gillette. He buys
a stock if and only if its share price drops below its
long-term true value (intrinsic value).
Having bought, Buffett typically holds for a long time
- provided the companies perform to his expectations.
The companies grow strongly, the share price grows
strongly, and the value of Warren Buffett's stock
portfolio grows strongly.
Buffett advocates that investors hold a
"concentrated stock portfolio". In other
words, you should own a very small number of stocks,
say six at most, and you should know everything there
is to know about these stocks.
Unfortunately, small investors often fail to implement
Buffett's strategy successfully. For one thing, many
of us - Buffett included, learn investing through
trial and error. Sure, we read as much as we can
before we begin, but reading isn't enough. It's only
when you've put your own savings on the line and lost
money that you really learn. Making mistakes is the
way most of us learn the most important lessons.
But if you've got to wait 5 years before a stock you'd
like to own sells at the right price, then you're
going to miss out on a lot of market experience. And
then it turns out you waited five years to make your
first mistake. The next five years will give you a lot
of time to reflect on that. You just have to hope that
you learn enough from your first mistake not to make a
second.
Small investors who want to invest like Warren Buffet
fail firstly because they do not have access to the
quality of information Buffett has. Compared with most
of us, Warren Buffett has enjoyed a privileged
position from the very beginnings of his career. He is
the son of a United States Congressman - a Congressman
who also just happened to be a stockbroker. The
Buffett family has been described as
"pillars" of their home state of Omaha.
From the start, Warren Buffett has been able to chat
with and gather information and advice from CEO's and
other big movers that small investors have no access
to. Warren began trading in stocks at the tender age
of 11 years.
Beginning investors fail because they learn in
"How to be a New Warren Buffett" books that
they must invest with a ten-year perspective or
longer. When their stocks go up, they're happy. When
their stocks do down, they're less happy but they tell
themselves "I'm a long term investor". When
their stocks continue to go down, they get worried.
When their stocks go down even further, they
eventually give in and sell - at a big loss. They do
not have the long-term confidence in their stocks that
Buffett - through superior information sources and
superior market experience - has in his.
Buffett buys his stocks with a skill few of us can
match. Most small investors, filled with enthusiasm
from reading "How to be a New Warren Buffett
" rush out and buy stocks. Unfortunately, most of
them pay too much for their stocks or the stocks don't
have as good long-term prospects of Buffett's own
picks.
They fail because, in addition to lacking Buffett's
superior access to information, they lack his
temperament. Buffett says if you cannot watch your
portfolio lose 50 percent of its value without
becoming panic-stricken, you shouldn't be in the
market. Well, according to that criterion, most of us
should think very hard before investing in stocks.
Although perhaps not panic stricken, most of us would
be deeply perturbed if our portfolio lost half its
value. For most of us, the money we're putting into
stocks is hard earned. To watch it disappear is
distressing. Many investors doggedly hold on to their
inferior stocks, believing they are following the
Buffett way. In reality they aren't and they will not
be rewarded because they paid too much in the first
place for inferior stocks.
Small investors fail because they do not have Warren
Buffett's genes. Buffett is an unparalleled genius who
has thought deeply about investment for decades. He
has developed an immense array of strategies and
tactics to keep his wealth increasing, irrespective of
market conditions. You should no more think you might
emulate Warren Buffett in the space of a few years
than believe that by studying physics in your spare
time for month or two, you might emulate Albert
Einstein or Isaac Newton.
Our opinion is that SEND and TREND are more
useful tools for most small investors than Warren
Buffett's methods. SEND identifies stocks that should
do well. TREND keeps you in them while they do well
and gets you out when the market begins to grow wary
of them.
In our opinion, Warren Buffett's methods are
appropriate for highly experienced investors who share
Buffett's temperament. New investors may be happier
beginning their investing careers with other
investment methods.
By investingator.com
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