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Principles Of Safe Investment In Equities
Investment | July 18

 

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”

                                                OR

                        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!

COMMENTS
Ankita  | Mumbai

Very true & helpful advice. I have always followed your advice in Long term Investment & made money. Ppl should closely watch their basket & never keep it loose.

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