The legendary investor
and greatest wealth creator of our times, Mr. Warren Buffet, having third
largest net worth of over $73 billion, while outlining his investment
philosophy, has, inter alia, advised the investors to keep in view the
following basic Rules while making investment in equities.
Rule No 1: “Never lose Money”
Rule No.2: “Don’t forget Rule No.1”
Rule No.3: “Keep all eggs in one basket but
watch the basket closely”.
The first two Rules are
for ensuring safety of investments while Rule No.3 is for derisking the investment in equities.
Mr. Warren Buffet’s
considered advice to investors is to be extra careful before making investment
in equities. He insists that investors should do their homework properly before
taking investments decisions. They should particularly look at the quality of
management, its track record , integrity & vision, capability to scale up
operations, type and size of business, sales and profit growth in the last few
years and more particularly during the last few quarters. They should also take
into considerations the capability of the management to usher in technological
changes and withstand the growing competition.
If investors go through
this exercise diligently, it is felt, their investments in equities will
certainly be safe and conform to Mr. Buffet’s Rule No.1, i.e , Never lose
money. The Rule no.2 is again a reminder to investors that they must, under all
circumstances, follow Rule No.1. The advice by Mr. Buffet’s to investor is not
to speculate or make investments in equities based on hearsay, rumours, tips or
on the basis of herd mentality. This will be sure way of losing money.
In this connection, it
pertinent to mention that Mr. Buffet is an avid reader himself and spends nearly
80% of his time reading to understand managements and businesses of companies.
Consequently, over the last few decades, he has invested in multibagger companies and
created significant wealth for himself as well his investors.
The shares of his
company, BERKSHIRE HATHAWAY is the costliest share on any exchange and quoted at New York Stock Exchange
at $ 2, 56,020 per share. The market cap of his company is over $420 billion,
third largest globally after Apple and Exxon Mobile. All this wealth has been
created by Mr. Buffet as a result of hard work and solid research in
identifying good businesses manged by competent management and continuous
monitoring of investments. According to Mr. Buffet, the money doesn’t create
man but it is the man who creates money.
BERKSHIRE HATHAWAY promoted
by Mr. Buffet own shares in 63 companies. Mr. Buffet writes only one letter
every year to the CEOs of these companies giving them goals for one year. He
never holds meetings and calls them on a regular basis. He has also given these
CEOs the following rules to follow.
Rule No.1: Don’t lose any of your shareholders money.
Rule No.2: Don’t forget Rule No.1.
The Rule No. 3, mentioned
in the beginning suggests that investors should derisk their portfolio by not
putting all eggs in one basket. Undue concentration of investment in one
company or one sector is to be strictly avoided. However, in imminent and
temporary cases, if it is becomes
pertinent to hold large investments in a single company or sector, one needs to
closely monitor this basket and derisk the portfolio immediately at first signs
of distress or disruption.
Investors are advised to
follow the golden principles of investment laid down by Mr. Warren Buffet and
see their wealth steadily grow. They are advised to do proper assets allocation,
invest wisely after proper research and hold
investments for a long time to reap the benefits of investment in equities.
Happy and Safe Investing!