Friday, November 5, 2010

Invest Like Warren Buffett


There have been a lot of personal finance articles here at Cash Saving Tips over the past couple of months. A lot of basic concepts about personal finance have been covered such as:

1) Paying off debt and the horrors of credit card interest

2) How planning for retirement is now our own responsibility

3) The importance of maintaining your money's purchasing power

4) Finally, the benefits of investing early and frequently


This brings us to the important topic of investing. There are numerous investment vehicles that exist, so it can be very difficult to know what to pick. Choosing the best investment option for you will depend on your risk tolerance and the return you expect on your investment. This article is about investment strategies in the stock market.

The stock market is inherently a very volatile investment arena. Prices can fluctuate wildly in a span of one trading day. Trying to spot trends in price volatility is the basis of what is known as technical analysis. Technical analysis attempts to spot patterns in price volatility and tries to time the buy and sell of a particular stock (which can be extremely risky). An opposing school of thought is fundamental analysis. This is where the investor rigorously researches the financial statements of a company before making an investment decision. This is the type of investing Warren Buffett practices (in conjunction with technical analysis to spot bargains).

Why should we care about how this Warren Buffett character invests? The reason is he is the most successful stock market investor of all time and has developed his net worth to over $45 billion US. We could all learn a thing or two from how Mr. Buffett has done this. One explanation is that Warren Buffett is a mathematical genius. When he looks at a companies financial statements, the numbers tell him a story. Just like how reading a book can tell a story, Buffett can piece together a story from pages and pages of financial statements.

You're probably thinking, "that's great that this guy can do this, but how does this help my investment portfolio?" Well, we need to study the methods and principles used in Buffetts investment decisions and implement them in our own investing. Buffett is not a day trader, nor is he a risk taker. He deliberately makes investment decisions after thoroughly doing his homework and we should too. One of the best books I've read about Buffet's investment style is entitled the "The Warren Buffett Way: Investment Strategies of the World's Greatest Investor" by Robert G. Hagstrom (borrow it from the library today).

If you are thinking of investing in the stock market or already have dabbled in it, I would highly recommend this book. Stocks aren't the only investment vehicle, but are an excellent option if you are tyring to find a very liquid (accessing your money fairly quickly) investment option. The stock market can be a very risky investment environment, however your risk will decrease as you do more research on the topic. Start doing your homework today and invest for tomorrow!

Check out this video about investing like Warren Buffett. Just ignore the endorsement at the end of the video.

How to Invest Like Warrent Buffett:

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