Warren Buffet is an icon as far as investing is concerned. About 10 years before now, a book was published about him by Robert G. Hagstrom, and it was titled “The Warren Buffett Portfolio.”
Of course, a lot of things have been written about Buffet by different writers, but what made Hagstrom’s stood out was how he gave us valuable insight into how Warren thinks about investments.
There are a lot of things to benefit from reading the whole book, but we have decided to bring out some little bits about the investor mindset and methods of improving stock selection that will help any investor get into the head of the “Oracle of Omaha”.
Ways to think like Warren Buffett to be a successful investor
- Increase the Size of Your Investment
- Ignore Market Forecasts
- Wait for the Fat Pitch
- Develop Alternative Benchmarks
- Recognize the Psychological Aspects of Investing
- Learn to Think in Probabilities
- Think of Stocks as a Business
- Reduce Portfolio Turnover
Increase the Size of Your Investment
Although it is not advisable to put all of one’s eggs inside a basket, on the other hand, Buffet isn’t embracing the idea of dipping all of one’s eggs in too many baskets.
This explained why he will rather make huge investments in only a few companies, and why he doesn’t invest in mutual funds.
Warren believes firmly that investors should first do their homework appropriately before they make a decision to invest in any security. But after the research, they can go ahead to commit a reasonable portion of assets to that stock.
Reduce Portfolio Turnover
Although an investor can make a reasonable amount of money by constantly trading in and out of stocks, Warren stated that such a person is just hampering their investment returns, as portfolio turnover will push up the amount of taxes that would be paid on capital gains.
Buffet said that things that makes sense in business will also make sense in stocks, and that he expects an investors to think long term.
Doing that will enable them avoid paying a lot of commission fees and lucrative short-term capital gains taxes.
Think of Stocks as a Business
The mistake a lot of investors are making is how they have chosen to approach the stock market.
Since they think of stocks as mere pieces of paper that are being traded among people of like minds, they are occasionally hindered from making the best investment choices.
But Warren feels stockholders ought to think of themselves as “part owners” of the business they are investing in.
By so doing, both Hagstrom and Buffett insinuate that investors are likely to avoid short-term based decisions, but they will rather choose to be more focused on the longer term.
Learn to Think in Probabilities
There is a card game Warren loves playing a lot, it is known as Bridge. In it, the most successful players judge mathematical probabilities to win others. And of course, it is glaring Buffet brought these strategies into the investing world.
He believes investor should pay constant attention to the economics of the companies they own (that is the underlying businesses), and should strive weighing the probability that certain events will come up or not.
Buffet said when an investor focused on the economic aspect of the equation and not the stock price, they will be more accurate in their ability to judge probability.
Recognize the Psychological Aspects of Investing
As far as the investment world is concerned, there are different types of mindsets, and there is a physiological mindset that successful investors own.
Successful investors like Buffet will choose to focus on probabilities and economic issues. They won’t allow their emotions influence their investing decisions.
Generally, an investor’s emotions can be his or her worst enemy. For a person like Buffet, the major way to overcome emotions in the investing world is to be able to retain one’s belief in the true fundamentals of the business, and shouldn’t be too concerned about the stock market.
Develop Alternative Benchmarks
There are certain metrics which Warren don’t focus on. One of them is how stock prices may be the major barometer of the performance of a given investment choice.
Rather, Buffet will scrutinized the underlying economics of a given business.
Successful investors should look at their own companies and study their real earnings potential.
Should the fundamentals be strong and the firm is improving shareholder value by amassing consistent bottom-line growth, then the share price should show that in the long-term.
Wait for the Fat Pitch
In the book “The Warren Buffet Portfolio”, Hagstrom drew our attention to the model of successful baseball player Ted Williams.
Ted would wait for a specific pitch (in a place of the plate where he is aware he had a high chance of making contact with the ball) before swinging. This act helped him to become one of the best in the sport.
Warren presented a logic to prevent investors from making unproductive investment decisions and should strive to improve the returns of their portfolios.
Ignore Market Forecasts
There are a lot of negative things some people have been saying about the stock market before now.
Some are spreading rumors that a recession will soon take place and everything will crumble. But things are still going on fine. So, there will always be negative people saying negative things.
Warren advice that we should place our sight on isolating and investing in shares that are not presently being candidly valued by the market.
By so doing, when the stock market starts to become aware of the firm’s intrinsic value, early investors stands a chance to make a lot of money.
The Bottom Line
Sure, every serious investor should read “The Warren Buffett Portfolio”. Buffet is a legend in the investing world, and this book revealed his psychological mindset.
However, we should also note the fact that it’s not just about reading the book, but about implementing these strategies.