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Top secrets of Warren Buffett’s success

Posted by Yogesh on Thursday, 18 September, 2008

With an estimated net worth of $62 billion, the world’s richest person and the greatest investor of all time, Warren Buffett ‘s timeless philosophy of value investing has proven relevant and profitable in all types of markets and financial environments.

Following his simple strategies, he has converted the holding company Berkshire Hathaway into a powerhouse today.

However, despite being simple, he believes in doing things patiently and differently because that’s the only way to stand tall in a crowd.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently,” he says.

You believe him or not, but some of the top secrets of the stupendous success he has achieved as an investor are here:

Simple living and high thinking

Very few people are aware that one of the top secrets of Warren Buffett’s stupendous success is simple living and high thinking.

In fact, anyone with modest means can claim to be leading a simple life. But give one money and one would start behaving like a king.

That, however, is not the case with Buffett who still leads a very simple life considering his status. Like, he lives in a house he bought ages back and dresses up in normal clothes.

“I just naturally want to do things that make sense. In my personal life too, I don’t care what other rich people are doing. I don’t want a 405 foot boat just because someone else has a 400 foot boat,” he says.

Having no unrealistic expectation

Unlike many investors around us, Warren Buffett never has had any unrealistic expectation from the market.

No wonder, he says that earning more than 12 per cent in stock is pure dumb luck.

“During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3 per cent when compounded annually …. For investors to merely match that 5.3 per cent market-value gain, the Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099!”

Thus, “if your adviser talks to you about double-digit returns from equities, explain this math to him,” he says

Not timing the market

One thing that Warren Buffett doesn’t do is try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares.

A majority of investors, however, do just the opposite, something that financial planners are always warning them to avoid.

Not diversifying too much

Buffett also likes to keep his investment portfolio limited and simple, and believes in adopting simple investing strategies.

“I want to be able to explain my mistakes. This means I do only the things I completely understand,” he says.

According to his philosophy, keeping one’s attention limited to selected stocks and investment avenues, and not diversifying too much also helps.

“Over time, you will find only a few companies that meet these standards — so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” he says.

Not investing money where it has been earned

Buffett does not believe in reinvesting earnings in the same business. Because no one can guarantee you the same return again.

May be you may loose your money in that process. So it is always better to look for new avenues where one can optimize returns.

“There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so,” he says.

Having no herd mentality

It is very easy to follow others and very difficult to carve one’s own way out. But it is only the second strategy which often makes one successful.

This philosophy holds true for the stock market as well.

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well,” Buffett says.

Source The Economic Times

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