Putting Warren Buffett’s Investing Advice Into Practice

Daniel Penzing
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Investing's relentless emotional “X” factor

Warren Buffett has explained that anyone investing in stocks for the long term needs two mentalities. The first is to act in the same way as if you were to be locked in a room with your stock portfolio forever … don’t do anything.

Do not panic when stocks fall. Do not feel elated when they rise, because if you are right, for a lot of people the gains will be temporary.

The second mental trick is to never sell any stock only because you “think” your stock is going lower. The market is smarter at keeping a market value for the stock than you are at picking the exact day to get out. The market doesn’t stop when you go to bed at night.

Apply a strict discipline where you don’t get cocky when things are going well, and you don’t get panicky when things are not working … but no matter what, you keep a handle on the total number of shares that you have paid for and decide when to sell.

You do not get upset if the value goes down one day because of a company-specific rumor. You do not get so elated that you start paying higher and higher prices for stocks that you now own … that will also lead to trouble.

Be fearful when others are greedy…

According to Warren Buffett, this is now the mindset of investors. It all starts with the purchase of stocks, the main goal before was the good life with a decent return where you could earn 7% gains, then it shifted to the 8% gain which would give you the ability to retire with plenty of wealth, then it shifted to 9% which would allow you to get out of the rat race a lot sooner.

People always want more, and that’s what pulled the market and the system down. Today, investors are looking for the big prize. The problem is, that’s what everyone else is looking for as well…it’s a tug-of-war battle. If everyone is pulling to the upside for huge returns and everyone is also pulling to the downside for huge losses, the end results are going to be somewhere in the middle…or close to it in some cases. Anyone who purchased stocks with no downside protection or some downside protection may very well have missed out on a big return.

…be greedy when others are fearful

And fearful when others are greedy.

I’m sure you’ve heard the quote “Be fearful when others are greedy and greedy when others are fearful.” I have heard some variations of this like “when everyone else is buying, sell and vice versa (don’t get caught up in the excitement).”

Warren Buffett said that this is his favorite investing saying and it’s really the key to my investment philosophy.

If you have never purchased a stock before, you probably don’t understand commodities much. However, buying stocks is the same concept as commodities (purchasing a company and a share of that company). We see this happen very regularly. And, it’s really easy to spot a buying opportunity like this.

There’s a saying in investing, “It’s much easier to identify an investor from a chart pattern than a chart pattern from an investor.” In other words, the chart patterns mean more than the investor himself.

The media and the Internet have reshaped numerous industries. News and media reporting have changed over the years from short articles to blogs, and from TV to interactive channels. The financial world is also susceptible to these changes, and, as a result, sometimes difficult to deal with in terms of the amount of information available and the speed at which it changes.

The growth in the amount of finance-related media and content especially of the online format has led to what has been called financial news clutter. News clutter refers to the growing number of financial news headlines, articles, and updates. This growing number of sources of information on matters of finance, which, while providing more coverage, also make it increasingly difficult to keep up. Thus, making it even harder to get a clear understanding of the economic climate, leading to unclear decision-making.

One of the most basic issues is the sheer amount of information that is available on Internet. Warren Buffett mentioned during his interview with Becky Quick, a CNBC host, that, in terms of gathering information, one needs to pay careful attention to the following two rules, which he believes are particularly important for people with limited time and resources:

  • Stay away from the headlines
  • Focus on the basics