Sunday, August 31, 2014

Good Investment Habits as per Mr.Warren Buffet

In his book 'How to pick stocks like Warren Buffet' the author Timothy Vick discusses good investment habits to be followed by a retail investor investing in Stock Market. These habits are culled from a series of comments made by Warren Buffet over a number of years.

These habits are required because human beings as investors make a series of mistakes. A rigorous following of these habits will help overcome these mistakes.

The mistakes regularly committed by human beings in their role as investors are:
  1. Desire to be a part of the crowd
  2. Overconfidence in our abilities
  3. Unable to assess probabilities rationally.
  4. Easily lured by story telling
  5. Want to rely on rules of the thumb even in absence of rigorous proof.
  6. Ignore statistical truisms regarding chance and probability
  7. Believe that intuitive skill possessed by some humans (successful stock pickers) are readily transferable

The following habits suggested by Buffet will help guard against these mistakes.

  • Follow your own counsel, not the advice of others. Have the courage of your knowledge and experience
  • Never be a price taker or assume the market is always right. Efficient market theory do not work at the level of individual stock.
  • Common sense and a knowledge of business is more important to the investment process than academic formulas. Let value scream at you.
  • Ignore da-to-day fluctuation in the market. They are often meaningless to the big picture. 
  • Most of the forecasts tend to be wrong. Don't blindly rely on them. We tend to 'Price' rather than 'Time' stock purchases. If you know that a share offers long term value, don't wait for the price to come down before you buy the same. 
  • Investing is about buying a piece of the company. It is not about shuffling share certificates
  • Arrogance will always get the best of you in finance
  • Let time be the natural friend of your portfolio. Run the winners and let compounding make money for you.
  • Don't overanalyse
  • Stay within your strengths when evaluating businesses
  • Judge a business by what it is worth to its owners and what it costs to maintain it.
  • Don't depend on others purchase prices to value the worth of the business. Do your independent analysis
  • Seek companies with Franchise Value (Like Kaya Skin Clinic)
  • Do your homework before purchasing a stock
  • Never feel compelled to buy or sell just because it seems fashionable
  • A low price doesn't guarantee bargain. The company must offer a combination of good value and improving fundamentals.
  • Volatility is you friend if you keep a business owner's perspective.
The last point worth a bit of explanation. Most of the investors feel happy when the share prices go up and feel sad when they fall. In this they are exhibiting the exactly opposite reaction to that they display to fluctuations in food prices. This was the point that I had made in my earlier post on Preethi Malhotra.

Why we welcome falling prices when it comes to food items and dislike the same when it comes to Stock Prices?. That is because, we know that we are going to buy food items perpetually and hence we can keep inventory of food items. However, when it comes to stocks, we consider each purchase as a one off purchase and hence feel Buyers Remorse when stock prices fall after our purchase.

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