Learn the approach favoured by the worlds biggest stock market pro and set yourself up to take advantage of this risky economy.
Here we are. It’s March 2020, Year of the Rat, deep into this Corona nightmare of a year. The market has crashed and the bear is looming down. Public life is in a strange, sorry state.
It’s a mad, mad world.
And yet, the show must go on. Another day another dollar. Commerce and industry old chaps. Let’s onwards and upwards.
I say that very tongue in cheek, but I’m kind of not joking. We must, I believe, keep calm and carry on.
And carrying on, I am. And if you are an amateur investor like me, then here’s the lessons from the master that lets you move forward with confidence and get that bright profitable future back on track. And if you’re not, you really should start considering it.
This is the time to be planning your assault like a stock market pro.
Invest like a stock market pro
So, when we say stock market pro, I am 90% certain, the first name that most investors would imagine is Warren Buffett. ‘The Oracle of Omaha’, as he’s known, is possibly the greatest investor of all time.
Now don’t get me wrong, I am well aware there are others and they all have their own strategy. But they’ll have to wait for another day. For now, I’m following the stock market pro who turned thousands into billions; especially now, to see how it’s done in a risky economy.
Who is Warren Buffett?
“Warren Buffett’s net worth is $75 billion. Warren Buffett is considered by many to be the most famous and successful investor in history. If you had invested $10,000 with Warren Buffett in 1966, today you would have over $160 million! That same $10,000 invested in the S&P would be $140,000.” Celebritynetworth.com
He’s an investor, and as you can see a pretty damn good one. Over that last 50 years they mentioned above, we’ve had all sorts of booms and busts, and through it all, he’s risen up and remained right up there in the top earners of all time.
All by allocating capital.
So, how do you do it?
Here’s Buffett’s basic rules of investing which I’ve accumulated over the past two years of studying investing.
1. “Be greedy when others are fearful”
This is Buffett’s single most quoted catch phrase. And it sums up the basic philosophy of a contrarian.
Basically, his philosophy is be fearful when others are greedy. This means, when the market is raging up and out of control; prices are surging through the roof for no reason at all and everyone thinks it’s Christmas everyday, this is the time for you to get worried. This is the sign of a broken market, it is not running on value, but running on speculation.
On the other hand, when the market has crashed out and every one is running for the hills, is the time for you to get greedy and snap up cheap qualities shares.
I think it’s pretty obvious where we are now.
We’re smack bang in Corona, fear city, and the market has crashed out.
So, if we follow the master, the only thing to think about is when we decide the market has bottomed out and what quality stocks we want.
(We’ll look at this issue more very soon.)
2. Keep some cash is rule 2 of the stock market pro
As Buffett warns: ”You can’t be greedy when others are fearful, after all, if you don’t have any money to invest.” The Motley Fool
Understanding the value of cash is a vital first principle of investing.
You need to know when it’s the right time to hold cash, like in savings or highly liquid assets, and when it’s time to use that cash to invest in equities, like shares.
The most basic idea is — when assets are cheap and they have great potential, invest your cash, as much of it as you can spare. And when they are way too expensive, and there’s nothing worth buying, then hold your cash and wait for the right moment.
A lesson for the future
Here, full disclosure, we kind of got caught swimming naked, as Buffett likes to term it. The sea of the stock market receded and we had no cash left to clothe ourselves.
I’m kicking myself now. We even said about a month out from all this, ‘it’s time to start holding some cash’, but we left it too late. We wanted to wait one more week, and another one more week, and we invested in stuff that was way overpriced.
Oh well, we do have a little in hand and we’re making money now. The lesson is now’s the time to throw in what we have, with a little more discretion than before, and really make sure next time we don’t be caught out again!!!
3. Own the business and not the share
Talking of discretion, this next rule is all about making smart choices.
“Another well-known Buffett quote is, “Our favorite holding period is forever.” Buffett thinks of owning stocks as owning businesses.” The Motley Fool
Most investors look at shares or assets and weigh up the numbers and essentially gamble on which way the market will go. This is not the stock market pro approach. This master’s approach is not to buy shares, but to buy companies.
Look at what companies you can be the owner of, and buy shares in the ones that are worth having. Then hold on like an owner and watch them grow.
The Owner Approach
“In a bear market, investors need to think similarly. One rule of thumb with buying stocks is not to invest any money that you plan to use in the next ten years.” The Motley Fool
So, the final part of this lesson is to know, if you are investing now, it’s not a get rich quick time. If we are actually in a bear market and going into a possible recession, it’s not like you buy cheap now and in a few days it’ll rocket up. (it may, but not likely)
The idea now is to buy a part of a great company that is seriously undervalued, because of the state of the economy, and give it time to reestablish it’s value — which, in time, should be way above what it is now.
This works for us. As we said, we didn’t stock pile our cash, so this news means we have time to keep buying-in as the value goes up. We just need to be very careful to see what makes a good company.
(Again, more in the future.)
4. Buy companies with a moat
And that brings us to our last lesson from the stock market pro.
Buy a company with a moat.
In future we will look at this in more detail. But as we’re in the middle of these big decisions, we’ll simply define a moat as protection.
Chose a company that you know is going to succeed.
For example: Coke Cola. It’s a brand and a product that has defined the lives of people for decades. It’s not going anywhere.
Also, Apple, another brand that defines a generation.
These are two companies that have great business models, they have proven products, they make huge profits and they appear to be run well, with well defined distribution, marketing, sales and so on.
These companies are going to bounce back and continue to make money for their shareholders.
I’d say that’s a pretty good bet.
So if you are an amateur investor, you should ensure right now is the time to get your head straight, do your calculations, and get ready for a big bright future.
Disclaimer: I’m no expert. I’m just another average investor. But going forward I can’t think of any better model to follow than Warren Buffett.
As always, you should do your due diligence, work out what’s right for you and move ahead with caution. We’ve done that, and while we’re jumping in both feet like crazy fool, we are going all in. (We’ll look more at this cautious but bold approach we’ve learned about in the near future.)
Invest in life, yourself, and in the market. Get involved and go from strength to strength.
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