Warren Buffett is in stock market since many decades. Irrespective of market direction he makes money. This article will guide you through the secrets of him doing same.
You don’t want to take stress of where will market go? When will be next crash? But, still want to make profit from stock market like other investors. Then, you are at a right place. Today I will be discussing with you how to beat market with warren buffet way without having to worry about stock market direction and any uncertainties. You are at right place. Warren buffet is not big fan of gambling and all that newspaper predictions. According to him you can’t predict market just by reading news and articles on stock market. There are some basic fundamental rules that you must consider if you want return from stock market without worrying about stock market. The points are so simple that you don’t need to spend hours scratching you head with financial statements.
Warren Buffett has a pretty simple strategy that he thinks is the best way for the overwhelming majority of people to invest. Here’s how the legendary chairman of Berkshire Hathaway thinks you should invest, even if you don’t follow the stock market.
When it comes to stock market you should broaden your perspective of looking at it. Warren buffet say by doing this you are inviting opportunities. You can see more things and if your analysis power is good you can convert those things into opportunities and then open gates to play with stack of cash. If you are heavily worried about stock market direction you should always invest in index funds.
While Buffett is without a doubt the world’s most famous stock picker, he doesn’t think most people should invest in individual stocks. For years, he’s embraced S&P 500 index funds as the best way for most Americans to build wealth. By investing in an S&P 500 fund, you become an automatic investor in all 500 companies whose stock the index tracks, including Berkshire Hathaway and many of its top holdings like Bank of America, Coca-Cola, Apple, and American Express.
In fact, Buffett has left instructions in his will stating that 90% of his personal wealth should be invested in S&P 500 index funds. The remaining 10% will be placed in short-term U.S. Treasuries. That indicates his confidence on performance of S&P 500 index funds. No matter what happens index fund will appreciate over the period of time and your investment will help you to cop up with inflation too.
A) Invest in Index like S&P 500:
Although Buffett is a long-time proponent of index investing for most people, Berkshire Hathaway only recently added two S&P 500 funds to its portfolio. In February, its filing revealed that it had purchased shares of the Vanguard S&P 500 ETF and SPDR S&P 500 ETF, though combined the funds still make up less than 1% of Berkshire Hathaway’s holdings. Again, warren buffet loves to choose stock and bet on them. He is not index lover because index returns are really really low as compared to stocks. I mean if you chose stock and it turns out to be your winning bet then index funds provide low returns.
And next important thing he mentioned is to keep your stock investment charges as low as possible. According to warren buffet, most fund managers who try to outperform a broad index like the S&P 500 will underperform in the long run. That’s why he loves to slam fund managers who charge high investment fees in spite of a not-so-good track record.
Buffett famously wagered $1 million that an S&P 500 index fund could beat five hedge funds over 10 years. He won the bet and donated the winnings to charity. One year earlier, he predicted his win in his 2016 letter to Berkshire Hathaway shareholders where he mentioned fund manager fees were a major factor. Warren buffet thinks that, “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”
So when you invest in S&P 500 index funds, look for one with the lowest expense ratio possible. The lower the expense ratio, the more of your money actually goes into the investment. For example, if you invested $1,000 in a fund with a 0.1% expense ratio, $999 of your money would be invested and the remaining $1 goes toward fees. In case you were wondering, the Vanguard and SPDR funds Berkshire Hathaway owns have expense ratios of 0.03% and 0.09%, respectively. Which is really low. And this is the main factor because even if you used your brain you are giving portion of your profit unnecessarily to some broker.
B) Choose your Broker wisely:
Imagine you choose the perfect stock and you invest perfect amount by considering your portfolio size and it turns out to be your winning stock as you analyzed and after closing deal to come to know that you are bound to share huge percentage of your profit share with broker. This is even more frustrating and fearful than losing money in stock market. That is why you should keep an eye on fees and try to go with as low as possible.
And remember before investing in stock market clear the debt associated with your credit card. The interest you pay is horrible. At Berkshire Hathaway’s 2020 shareholder meeting, which was held virtually in May, Buffett was asked about the state of the credit card industry. He used the occasion to remind the world of the high cost of carrying a credit card balance — even though Berkshire Hathaway often profits from credit cards, given its heavy financial sector holdings still buffet recommends to stay away from credit card.
And to justify this Buffett told the story of a friend who sought his advice about what to do with her money. He asked her if she had credit card debt. She did, with an APR of 18%. Buffett told her that the interest savings from paying off the credit card debt would be far greater than she could earn from any investment. As most of the people are under credit card debt majority of time it is unnecessary. But still people do love credit card. So, by saving the interest money that would you have to pay after sometime is the biggest saving you could ever done.
C) Average your investment:
Next thing warren buffet focuses on try to average your investment. Wait, before thinking ahead it does not mean you have to adjust your losing position by buying the same stock again and again. According to warren buffet you need to invest amount over the period of time at regular interval. Buffett isn’t a fan of market timing. In February, at the start of the coronavirus pandemic, he told CNBC, “you can’t predict the market by reading the daily newspaper.”
And Like his mentor Benjamin Graham, Buffett is a proponent of dollar-cost averaging, in which you invest regularly at fixed intervals no matter what’s happening in the stock market. You don’t have to worry about market Is trading at all time high or low. Just keep on investing over the period at regular intervals. So, when he recommends funds that track a broad-based index like the S&P 500, for most investors it’s with a warning: “Don’t put your money in all at once; do it over a period of time.” That means if you have got money just don’t blindly invest all of it in index at any given point of time. That means if you have got 100 dollars invest 20 dollars at regular intervals. So, even if let’s say you invested your first 20 dollars when market was at all time high and suddenly it crashes still you have chance to invest another 20 dollars of your portfolio when market is trading at low price. So, this is how you are not at loss at all you will be either in profit or in no-profit. But, definitely not in loss. Because, averaging your investment will save your hard earn money.
And next thing warren buffet insists is to look at long term investment. He says try to avoid getting panic because of short term volatility in market.
D) Long -Term Investment:
And Some of Buffett’s greatest words of wisdom are about the importance of long-term investing. Regardless of whether you follow his advice and stick with passively managed index funds or pick your own stocks, he suggests you ignore short-term results and focus on four- and five-year averages. On an average 4 to 5 years it may extends to 10 or 15 years also. But, generally on an average warren buffet says whether your investment is worth or not will come to know after 5 to 7 years. So, you can take appropriate decision based on that. As long as you’re invested across the stock market, Buffett believes you can count on good results over time. As he put it in his 2016 letter to Berkshire Hathaway shareholders, “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”
This are some really easy ways you can implement if you are too worried about stock market direction. And definitely if you are looking at long term factor there is high probability that market will give you some really good returns out of your investment.