handwritten marketing exit notebook
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At this juncture in the year most of us are wondering whether Christmas bonuses are on the cards and whether we can expect increases in the new year. This year has been tumultuous at best and down-right crazy at worst. However, should you find yourself at the receiving end of some extra cash here are some nuggets of investment advice from the man himself, Warren Buffett. The 90-year old billionaire has consistently held onto his fortune by remembering the following:

  1. Invest in what you know

Most of us will spend our entire careers working in roughly only a handful of industries. One of the easiest ways to do yourself a disservice is by investing in something overly complex, where you don’t fully understand every facet of the industry and what could affect share prices.

“Never invest in a business you cannot understand.” – Warren Buffett

Yes, it’s true that the majority of publicly-traded companies participate in industries that we have little or no direct experience in. That doesn’t mean you shouldn’t invest in these areas of the market, it simply means that it’s imperative to do your homework and approach with caution.

  1. Never compromise on quality

Identifying high quality businesses is far more challenging than simply passing on industries you find confusing and overly complicated. One of the most important financial ratios to gauge business quality is return on invested capital. Companies that earn high returns on the capital tied up in their business have the potential to compound their earnings faster than lower-returning businesses. Resulting in the inherent value of these businesses rising over time.

“Time is the friend of the wonderful business, the enemy of the mediocre.” – Warren Buffett

  1. When buying stocks, plan to keep it forever

Only patient investors are continuously rewarded as quality businesses earn high return and increase in value over time. Think about it, the cornerstone qualities that your business is built upon could take years to develop properly, so too could your stocks take years to reach their full potential.

“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffett

Buffett famously spent more than $1 billion on Coca-Cola stock in 1988 and still owns it today.

  1. Diversification could be dangerous

Let’s say your portfolio consists of between 30 to 70 stocks across various industries, how will you keep tabs on all of them without staying glued to financial websites 24 hours a day? Excessively diversifying investment portfolios are usually done out of fear and/or ignorance. Unless you trust your financial advisor/fund manager to always have your best interest at the forefront of their mind it is imperative that you also know what’s happening in the markets. Staying on top of current events impacting your stocks could thus prove to be quite challenging.

“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.” – Warren Buffett

  1. Value vs Price

 In most cases stock prices are far more volatile than business fundamentals. Thus, there could be times in the market where the stock prices have zero correlation with the longer term outlook of the company. During a financial crisis many investors are quick to sell off their stocks, irrespective of the business quality and long-term earning potential. Stock prices change along with investors’ emotions, but that doesn’t mean a company’s future stream of cash flow has changed.

“Price is what you pay. Value is what you get.” – Warren Buffett

  1. The best moves are usually boring

Investing is a marathon, rather than a sprint. After all, the goal is to find quality businesses that will compound in value over the course of many years. If you get this right, your portfolio’s return will take care of itself. Many companies that boast long and successful corporate lives provide basic products and services – snacks, beverages, toothpaste, medicine, convenience stores, etc. Nothing exciting…

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” – Warren Buffett

There’s no need to try to be a hero or try to impress anyone with your investments, slow and steady wins the race.

  1. Only listen to those you know and trust

Investment firms are there to <gasp> make money, that’s right they’re simply in the sales game. Don’t blindly invest with someone pitching you his best sales mumbo-jumbo. Rather take a look at those you know, successful family or friends, ask their advice before trusting a complete stranger with your future earnings.

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” – Warren Buffett

No one cares about your nest egg more than you do so it’s up to you to do your homework.

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