October 24, 2019
Stock market investing has a reputation for being difficult, complex, and risky, but the truth is that it doesn’t have to be that way. Ask any economist who studies the market for a living or a successful billionaire investor like Warren Buffett. They will both tell you the same thing; succeeding in the stock market is mostly about following a few key, extraordinarily simple principles.
Would-be stock market moguls constantly ask Buffett for his secrets and are often surprised by his down-to-earth, almost common-sense answers. Everyone sets out with big dreams of beating the market and striking it rich overnight, but if you want to learn how to invest like Warren Buffett, slow and steady wins the race.
Roughly seven hundred years ago, William of Ockham came up with the principle we now call Occam’s Razor, which is, the simplest option is almost always correct. Warren Buffett embodies this idea, both in his life and his investment strategies. Buffett made his fortune by distributing his capital among stable, well-established companies that were already known to be financially solid, not by gambling on radical ideas.
Instead of seeking out insider secrets and trying to guess which penny stock is going to blow up next, a more certain way of investing is to put your money into well-established brands that have seen consistent growth over a long period of time. It’s not an exciting or flashy way of investing, but it has been proven to work.
The nice thing about Occam’s Razor is it also means the easiest option is often the best one, as is the case with investing. Index funds have been proven time and again to consistently outperform investors who try to beat the market. In other words, one of the best financial decisions you can make is to not waste any time or effort trying to guess which stock picks are the best investments.
Part of learning how to invest like Warren Buffett is training yourself to leave your emotions out of it. People are emotional creatures, and new investors tend to let their emotions get the best of them when trading. Once you start looking at stock market investing as a game that is played over decades rather than days, you quickly learn to ignore everyday fluctuations in the value of your portfolio.
In the grand scheme of things, even major shake-ups like the crash of 2008 are a non-issue. Imagine it this way; if you had invested in a range of quality companies in 2000 and then did not look at them again until today, there would be no indication that the crash ever happened at all. By ignoring the panic and leaving your investments where they were, you would have come out ahead of everyone who pulled out due to fear.
Warren Buffett is famous for buying stocks and holding them forever. Not literally, but figuratively forever–he holds a stock for 20 years and then sells it at a profit. If you do your research and purchase truly quality investments, there is no reason you should ever have to adjust your portfolio going forward.
Researchers at Yale put out a study confirming that Buffett’s actions line up to his words of wisdom. They were able to mathematically prove that his wealth is, in fact, a direct result of buying stocks that were well-known to be safe, quality investments. If you subtract all the money Buffett earned off of investments that meet these criteria, you end up subtracting 99 percent of his wealth. Both mathematical studies and the world’s greatest investor fall squarely on the side of simple, long-term investments. So, to all you new investors out there, take a tip from a seasoned professional and chose your investments wisely and for the long-term.
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