When thinking about investment strategy it is always good to go back to the classics and learn from the masters. Warren Buffett is such a master and his record speaks for itself. Here are a couple of good tips from him.
Circle of Competence according to Warren Buffett
When you think about investing in a company, or starting a company for that matter, start from your circle of competence. Start with what you know for the simple reason that you are better able to evaluate correctly. If you understand the brewery business, for example, you are in a better position to evaluate a company and their business practices better.
You invest in a business
Remember that when you buy a stock, you invest in a business. Don’t think of it as a pure monetary transaction, where you put one number in and get a bigger number out. A stock is part of a business, look at the business, their business practices and everything that makes it run. If you understand that business, and believe in what they do in the long run, then go for it. You are investing in what you think they are doing well. Make sure you understand what they do, and how they do it, as best as you can before investing.
Let us now assume we have looked a company that is within our circle of competence, that will help us evaluate the value more accurately. Furthermore, we understand and believe in the business and their long term development. The last step is simply to put a number on what you think a company is worth, and compare that to what the stock says it is worth. If the stock is valued lower than what you think the company is worth, you should invest. However, remember that you are prone to make mistakes, therefore don’t be shy when you decide you need a value margin between your estimation and the actual estimation of the company.
Invest long term
When you finally decide to make an investment do it long term. Do it fully, don’t be afraid to use your entire your bankroll for investment, even take a payday loan and borrow cash online if the margins are there. But be ready to stay long term. It is all about your long term evaluation of the company, and as long as the stock is lower than your estimation of the company, there is reason to stay in. Remember, you look at the business health long term, therefore, don’t be afraid to stay with it for the long haul either.