Video Editor: Ashutosh Bharadwaj
How should investors prepare for economic slowdown? Can they turn it into an opportunity?
Different experts have different opinions about it. But what is the opinion of the ‘investment guru’ of the world?
Warren Buffet’s Views on Market Investment During Economic Slowdown
Investors across the world blindly trust the advice given by Warren Buffet. Ironically, Buffet himself has said that blindly trusting anything in a market is the biggest mistake an investor can make. This is a common mistake made by new investors.
Buffet is the CEO of American firm Berkshire. He is the world’s third-richest person and owns assets worth more than $85 billion.
Buffet’s 'Rules of Investment'
Rule No 1: Never Lose Money
Rule No 2: Never Forget Rule No 1
An economic slowdown catches most investors off-guard. People shy away from share markets and start seeking safer investment options, like gold, etc. But when everyone is running scared in the share market, Buffet takes the opposite route and becomes more greedy. He starts looking for more options to make money and the world appreciates this investment policy of his.
Hence, we decided to share with you the investment lessons of Warren Buffet so that you too can become a smart investor.
Lesson No 1: Follow the Basic Rules of Investment
The most important factor while investing. Warren Buffet says you shouldn't invest in a company only because it is showing growth, rather, you should follow the basic rule.
For example, find out what is the business of the company that you are investing in. Does it have a good operating history? How is the management of the company? What is the value of the business conducted by the company? Consider the answers to these questions as parameters on which you can measure a company’s performance and then take a decision on investment.
Lesson No 2: Understand Market Changes and Use Them to Your Advantage
Around 2016-17, retail business witnessed a boom. But at the same time, retail business was transitioning from shopping malls to online markets. Noticing this trend, Buffet sold his Walmart shares and bought Amazon shares instead.
Lesson No 3: Buy a Basket of Good Companies
Even during an economic slowdown, companies of successful businesses often outperform market expectations. Hence, investors should keep an eye out for companies belonging to such businesses. Even during a slowdown, these companies can earn you a lot of money.
Lesson No 4: Be Prepared to Adapt and Embrace the Change
Sticking to a certain set of rules is not good. One must be prepared to adapt to changes in the market. Buffet, quoting from his own experience, says that earlier he believed that airline industries were a well of death for investors. But after one of his colleagues advocated for decent growth opportunities in this sector and he noticed some consolidation, Buffet himself decided that his company should buy shares of Southwest Airlines. This shows that Buffet wasn't rigid in his belief. He embraced the change.
Lesson No 5: Don’t Be Trapped By Quick Money-Making Schemes During a Boom
Remember how Bitcoin witnessed a boom in 2017? Now, Bitcoin has slumped. In 2014 itself, Buffet had said that Bitcoin is a mirage.
Lesson No 6: Invest in a Business That You Understand
When America saw a ‘dotcom’ boom, Buffet didn’t invest in those companies because he lacked the understanding of the business. As an investor, it’s quite possible that you may not be well aware of all sorts of business. But, invest only in those businesses that you understand.
Lesson No 7: Understand the Real Value of Shares
Warren Buffet says that instead of buying an average company’s share for an inflated price one must try to buy a good company’s share for average price. Never decide a share’s value by judging who its promoter is.
Lesson No 8: Remain Disciplined and Patient
Even if the price of a company’s shares is low and everything from fundamentals to management is okay, don't start buying them straight away. Buffet says that while investing, never let your instincts take control of your brain. As an investor, you must maintain your discipline.
Lesson No 9: Don’t Buy Shares Just Because Their Prices Are Low
Buffet believes that buying shares just because they're cheap is the height of stupidity. If the price of a share drops from Rs 50 to Rs 40 then it doesn’t automatically imply that you've got a better deal. It’s possible that the current status of that company is such that even Rs 40/share is too high a price. Always take a look at a company’s fundamentals and earnings before you make an investment. Don’t use your ‘sixth sense’.
Lesson No 10: Market Volatility is Your Friend
Buffet believes that even though most people consider market volatility a risk, it can be made a friend. If you understand the volatility, it could turn out to be the best time to make a quick buck. His company, Berkshire Hathaway, has thrice faced losses of over 50% of its net worth. But the worth of Buffet's personal assets never dropped more than 2%. This was possible because even during volatility, he bought shares of good companies at a reasonable rate.
Buffet is such an important figure in the world of investment and shares that 10 lessons aren’t enough to fully describe the way he does things. They are more like guiding principles that can help you go a long way.
However, his most important lesson will always be – invest in yourself.
(At The Quint, we question everything. Play an active role in shaping our journalism by becoming a member today.)