Risk comes from not knowing what you’re doing. – Warren Buffett
There is no doubt that Warren Buffett is known as one of the world’s most successful financial market investors. Biography.com states the following: “known as the “Oracle of Omaha,” Warren Buffett is an investment guru and one of the richest and most respected businessmen in the world.”
Ergo, I believe there is much to learn from his investment style, the fundamental values he places his investment decisions on, as well as his personal ethos. Let’s face it; Buffet must be doing something right to have achieved the status of being the richest man in the world.
Therefore, let’s have a look at how he goes about evaluation a financial asset to determine whether it is worth investing in or not. We can then apply this to our personal trading strategies.
Beginnings: A brief synopsis of his early life
Warren Buffet was born in Omaha, Nebraska, USA, in 1930. His father worked as a stockbroker and served as a US congressman. His mother, on the other hand, stayed at home; ergo, she was a homemaker.
Buffett was a mathematical prodigy who could add columns of numbers in his head, and he demonstrated an intimate understanding of financial and business issues from early on. He would often visit his father’s stock brokerage as a child, and at 11 years old he bought his first three shares. The story goes that Buffett bought Cities Service Preferred shares at $38 per share. Unfortunately, the share price quickly dropped to $27, but he did not sell them. He held on to them until the stock price reached $40. He sold his three shares at $40 per share; however, he has stated that he regretted this decision because the stock price continued to climb to nearly $200 per share. When describing the need to learn a lesson about patience in investing, he uses this life lesson.
Warren Buffett the adult
The rest of Buffett’s biography reads along the lines of he started his first business at 13 years old. Throughout his high school career he plotted new ways to make money. When he graduated from high school, he enrolled at the University of Pennsylvania to study business. He was heavily influenced by Benjamin Graham’s book, The Intelligent Investor, and enrolled at Columbia Business School to study under Graham.
Fast forward to 1956, Buffett formed the business Buffett Partnership Ltd., and by utilizing the techniques he learnt from Graham, he was successful in identifying undervalued companies, bought shares in them, and became a millionaire.
Translating Buffett’s success into our investment strategies
Buffett’s life history continues to read as above; however, the point of this article is to determine how we can apply a few of his investing skills to ensure trading success on our part.
Flexibility along with rigidity
While Buffett’s formula for success is a combination of adaptive, lateral thinking, he also sticks to his guns. He is not an emotional investor. If we translate this concept into that of successful day trading, day traders require a rigid, disciplined approach to their investment strategies; however, by following in the footsteps of Buffet, they should also be open to adapting their strategies to the current socio-economic environment.
Invest in what you know and understand
Buffet attributes his success to the fact that he only invests in assets in the financial market categories that he can understand and analyse. Therefore we should also only trade on the underlying assets that we know and understand. It doesn’t help trading on the Forex market if we do not understand the mechanics of foreign currencies and what influences their movements against each other. We can, however, take advice from our online trading broker. If we have signed up with a quality broker such as Lionexo, they will provide substantial amounts of statistical analyses and graphs to help us understand the assets we wish to trade on.
The intrinsic value of a company
It is important to determine what the future value of a company will be and then work this value or price back today’s price. This way you will be able to determine the long-term value of investing in this share as well as what trading strategy you should employ when placing your trades. For example, a particular asset might have a short-term trading value, but no value in the medium- to long-term term. By ascertaining this value, you will be able to determine if you should trade on it or not.
There is not doubt that Warren Buffet is an astute investor. He does not make emotional trading decisions, he is not ruled by the current socio-economic and geopolitical circumstances, and he exhibits patience when trading. Thus, I believe that we have lots to gain by emulating his approach!