One of the greatest investors in our lifetime, Warren Buffet, often leaves us nuggets of advice that’s well documented and discussed by many. Here are the 6 rules to investing that he’s mentioned:
Rule #1: Cash is not a good investment.
Warren Buffet often says “Get out of cash, and get into assets. It goes down in value over time. We will always cash around, there is surplus cash around.
This is true for almost every currency, how much it depreciates in value over time. The dollar will always be worse 10/20 years from now”
Obviously, this is about inflation and the amount of money government prints. The more money is printed, the less value-able it is. So the conclusion is it’s better to have your money grow or make more money than have it stay put and lose value over time.
Rule #2: Invest in productive assets.
Warren Buffet often says “Find value in what something will produce. What will it be in the future? You will pay based on how much it will deliver over time. Success of investment of whether it meets expectations on what it delivers. Look what we think can be delivered from productive assets we can earn, and how we can utilize that capital in acquiring more productive assets.”
This is about investing in things that produce return, rather than the perception on how much people think it’s worth. So it’s all about thinking about what you’re putting money into, whether it’s just sitting there or providing money back. More so with stocks and the value of what the company is doing for the world and how much that might be worth, then what it’s worth today.
Rule #3: Stay in your circle of competence.
Warren Buffet often says “Defining what your perimeter of what you know and what you don’t know. If you start fooling around somewhere else, eventually you’ll get creamed, and you should.”
This is about using your expertise to figure how much sometimes is worth. If you know something, you’ll have an easier time knowing how to go about it, and the ins-and-out of that subject matter. If you were to invest in something you know vs you didn’t know, most likely the thing you know about would be more successful. I think generally Warren is mentioning to stay away from the hype, surely those are things you probably weren’t aware of til the market was raving about it.
Rule #4: Evaluate companies first.
Warren Buffet often says “How much is it selling for, how much do we think it’s worth. Look at company first, try to value it. Don’t look at the price first. cause if he does, he’ll be influenced by it.”
This seems to be about the understanding of what the company does for the world, and if it’s providing value. If a company isn’t producing value and doesn’t make sense, surely you’d know or be hesitant about investing in it.
Rule #5: Play big and don’t waste opportunity.
Warren Buffet often says “Big opportunity in life has to be seized. To do it in a small scale is just as a mistake of not doing it at all. You wont get 500 big opportunities. If you got out of school, and were given a punch card with 20 punches on it. You would be more careful in your selections.
The temptation to dabble especially in bull markets – stocks is so easy that you can do it online and can put your hand in trying many things, but uou don’t make money over time doing that. If you have 20 punches, you would think a long time over investment decisions. You would make good one and big ones.”
He sounds pretty ambitious here, but seems like less and more thoughtful investments is something he shoots for.
Rule #6: Invest in yourself.
Warren Buffet often says “The best thing is to have your own talent. No one can take it away. Inflation, Taxes, and none can take away from it. If you can increase that value over time, 50x times of it – you should get paid 50X times more. No one can take that away from you. Develop the habits…look at the brain power and energy of successful people, and develop their habits of success.”
This seems to be about admiring work ethic and the mindset of success, rather than copying what others say they’re doing or have done. This is about understanding what you need to learn to improve yourself.
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