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| Two Simple Investing Tips from Warren Buffett |
Submitted by:
08/14/2008 1:51 AM
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 Warren Buffett, the world's richest person and arguably the world's greatest investor, has two simple investing tips which he says can help improve your investment returns.
1. The Mental Punch Card
Speaking to a group of MBA students Mr. Buffett said that an investor could improve their returns if they were simply given a punch card with 20 slots. Each time an investor made a new investment they would punch a slot. Each investor would only get to make 20 investment decisions over their lifetime. This Buffett contends would force people to give a greater amount of thought to their investment decisions and thus make better decisions.
There are a few pieces of wisdom in this tip. First, there are a lot of forces prevailing upon us to make decisions, lots of them, and as a consequence we don’t give our decisions a lot of thought. Instituting a mental punch card forces us to slow down and think through our decisions to make sure we are making the best decision we can make.
The second bit of wisdom in Buffett’s punch card tip is that you don’t need to make a lot of decisions to achieve remarkable results. Throughout his career Warren Buffett has learned that you only need to make a few smart decisions to achieve great returns. Buffett doesn’t take just any investment pitch that’s thrown his way. He waits, and knows that he only needs to make a few smart decisions. For example, Buffett invested just over $10 million in the Washington Post Company in 1973. Today that investment is worth just north of a billion dollars. You only need one decision like that in a lifetime to be a successful investor.
2. The Buy Slip
Once in an interview Warren Buffett mentioned that folks could improve their investment results if they simply wrote down why they were buying a given stock. In fact, he once proposed to the head of the New York Stock Exchange that people should be required to fill out on a buy slip why they were buying the stock. Again, this is another tip that is designed to get people to stop and take more time to think about the decision they are making. If we forced ourselves to write down why we were purchasing a stock it might keep us from making some dumb decisions. I wonder how many people would have a stock journal that said: “I’m purchasing XYZ stock because I got a hot tip from a colleague at a cocktail party” or “I’m purchasing XYZ stock because Jim Cramer mentioned it on his show” Looking at your reason on paper in black and white might bring about a soberness that keeps you from making an impulsive or ill thought out decision.
These tips from Warren Buffett are for active investors who choose their own investments. For most people Buffett recommends owning index funds with low expense fees. Buffett mentions that very few actively managed funds beat their respective indexes and that the fees these funds charge can really add up over time and eat into overall returns. I will be covering indexing versus actively managed funds in future posts.
Photo credit: wikipedia |
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