You must be knowing Warren Buffett if you are in the world of investments for quite some time.
He is one of the biggest and most successful investors in the world.
Also Read: 10 Habits of Highly Successful Investors
There isn’t anything more valuable to an investor community (especially long-term) than Warren Buffett ‘s letters to shareholders.
These aren’t any ordinary annual letter of a company which gives updates about business operations and views about the future but a lot more than that. These letters not only covers Berkshire Hathaway’s performance and its future prospect but also contains holy investment lessons and advice.
Any aspiring investor willing to build up a storehouse of knowledge should surely read and re read the letters to compound the knowledge.
Warren Buffett has started writing these letters since 1950’s.
Some of the key lessons from Warren Buffett letters are stated below-
Though the full 28-page letter is worth reading, we have highlighted some of the important lessons for the new investors who haven’t read any report before.
The following are the key lessons from shareholder letter 2016 by Warren Buffett –
1. Don’t just blindly pay for the brand name or goodwill
Excerpt: “As is the case in marriage, business acquisitions often deliver surprises after the “I do’s.” I’ve made some dumb purchases, paying far too much for the economic goodwill of companies we acquired. That later led to goodwill write-offs and to consequent reductions in Berkshire’s book value.”
Simply buying stocks of companies for the sake of its goodwill or brand value may prove to be a laggard investment in the future.
It’s important to understand the company’s growth potential and what it can become in the future.
In simple words, it’s a wise to focus on company’s growth prospects rather than its brand name.
Hence, as an investor, it’s really a bad idea to pay a very high price just behind the comfort of company’s reputation and goodwill.
2. Buy stocks during panic and fear in the market rather than selling them
Excerpt: “Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
India being an emerging nation is greatly impacted by events both domestic and international. The Indian stock market during geopolitical events like Indo-Pak tension or during Brexit referendum saw a good correction in the stock market. Even domestic events affect market in a great way like the one saw a few months back due to demonetisation.
To know more about the lessons that can be learned from Warren Buffet’s leeters to his shareholders you can watch the video below:
Most people during this time was selling in panic following herd mentality but these corrections pose an opportunity for long-term investors as during such times you get good and fundamentally sound companies at bargain prices.
After a good correction post demonetisation, the market took a good rally and today made a new high on the back of BJP’s win in Uttar-Pradesh.
So if anyone would have bought stocks of sound companies would have made decent gains in the latest rally in last 2-3 months.
3. Ride your country’s growth wave
Excerpt: “You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.”
India as a country has shown a phenomenal growth in the last several decades.
India’s GDP has reached whooping $2100 billion in 2017 from a mere $40 billion in the year 1960.
Even India’s stock market index, Sensex has reached 29500 from mere 100 marks in less than 40 years.
The government’s various infrastructural reforms, building of smart cities, demonetisation step to eradicate black money from the system, internet penetration both in rural and urban areas, more companies are coming up, more and more people travelling abroad etc are nothing but pure growth.
So if you are bullish on the India growth story, why not be a part and enjoy the country’s growth wave by making suitable and appropriate investments.
4. Avoid fear and do not let emotions come in a way of making investments
Excerpt: “Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
You will always find media advising to sell during a correction or a fall and gives you a rosy picture when market rally.
Though if we are in an uptrend all intermediate corrections are a buying opportunity and all rallies should be a selling one.
The media will give you all sort of an explanation and calculation for if and buts.
However, on the other hand, the smart investors generally enters the market at a bear phase when no one is willing to buy and sells when there is a euphoria in the market.
Hence, it’s always advisable to avoid all market noise and do your own research.
5. Think long-term
Excerpt: “Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision)”
Most people in the stock market have a tendency to make quick profits and make quick exits.
But in making those 10-15% quick profits, we have a tendency to miss the winner ones which later turns out to be a multi-bagger.
It’s always advisable to exit the loss-making ones and keep holding the winners unless it stops giving growth.
To know more about Warren Buffet style of investing you may do: Value Investing Strategies course.
These lessons are no more than holy lessons to the investor community and it is a wise thing to not only read but also implement this in your real life.
I hope you enjoyed reading the lessons. Please don’t forget to give your valuable feedback in the comment section.
Take care and Keep Learning!!