What Warren Buffett Would Do: 5 Tips for Never Losing Money
Warren Buffett is arguably one of the most successful investors of all time, so it’s no surprise that many of his followers try to take cues from his strategy. If you are thinking about imitating some of Warren Buffett’s investing habits, here are five things that he would do if he were in your shoes.
As a value investor, Mr. Buffett knows that the market is volatile and risky at times. He makes sure to never lose money by avoiding cut-throat competition with high entry costs and instead focuses on companies that he can acquire at a discount while they are going through a rough patch.
Here are five ways you can follow in Warren Buffett’s footsteps and never lose money as an investor:
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Focus on fundamentally sound businesses
Investing is as much about the business as it is about the stock. Make sure you have a good understanding of the company’s products or services and their potential for growth in the future.
Also, remember to diversify your portfolio so that you aren’t putting all your eggs in one basket. It’s even better if you can find some small-cap companies that are not listed on a stock exchange.
Such companies are likely to see less volatility in their stock price, which is crucial to never losing money.
Avoid competition with high entry costs
When it comes to industries with high barriers to entry, you want to stay well away. Buffett would never invest in sectors like pharmaceuticals or biotech because the high cost of research means that profit margins are always very low.
He focuses instead on industries where there is little competition from new entrants and the cost of production is low. Industries like railroads, utilities, and insurance have very low barriers to entry and produce steady, predictable profits year in and year out.
Diversification is key to never losing money
When you are investing in stocks, you are essentially buying a piece of a company. While you hope that the company will do well and the stock will go up, the unfortunate fact is that some companies go under, and the stock ends up worthless.
While it’s impossible to completely prevent losses, you can greatly reduce your risk by diversifying your portfolio. You can do this in two ways: by diversifying your portfolio by industry, and by diversifying within industries as well.
If a particular industry or company becomes very volatile, you don’t want to have a lot of money invested in that one place. This way, if one investment does poorly, it will not impact all of your other investments.
Hire a quality broker who has your interest at heart
It is important to note that Buffett has never employed the services of a stockbroker. Brokers get paid based on commission, and this reduces their incentive to act in your best interests, as opposed to theirs. So, if you invest in stocks, try to find a broker who charges a flat fee for trading rather than a commission.
Alternatively, you can also go with a Robo-advisor, which is an online financial service that offers low-cost investment advice. If you want to never lose money as an investor, you need to make sure that the broker or financial advisor you hire is a fiduciary.
This means that they are legally obligated to put your interests first, as opposed to their own. While you may pay a bit more in terms of fees, it’s well worth it to avoid getting caught up in a conflict of interest.
If you want to never lose money as an investor, you should focus on fundamentally sound businesses, avoid competition with high entry costs and hire a top broker who has your interest at heart.
You can also diversify your portfolio by investing in a wide range of industries, including utilities, railroads, and insurance.
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