Monday, 3 June 2013

How to Become a Millionaire by Investing - Five Investment Strategies of Warren Buffett

Stock investment is one of the fastest ways to become a millionaire. Warren Buffett is a good example of a billion-dollar investor. To be a successful investor like Warren Buffet, you have to first understand his beliefs towards the market and his investment strategies.
1. The market is irrational
Warren Buffett believes the market is irrational. It is often driven by greed and fear. Do you know people who buy when the market has gone up and sell when the market came down. Or are you one of them? If you have done your research and understand the true value of the stocks you have bought, you will feel secured and will no longer be worried when the prices go up and down.
2. No one can predict the market consistently
Take a moment to recall, have you heard stories about someone who spend money to buy mysterious trading systems, hoping to make good profits but only to be disappointed? Average investors try to predict the market's next move. When they cannot predict, they give money to the so-called experts who claim they can. Warren Buffett believes that successful investment has nothing to do with the ability to predict. Master investors know that no one can predict the market consistently.
3. Huge returns with little risk
While many people talk about "high risk, high return", Warren Buffett believes in huge returns with little risk. In fact, Warren Buffett is a very risk adverse investor. His first rule for investment is "Never lose money" and his second rule is "Never forget the first rule". People think of investment as high risk because they have not learnt how to do it properly. Just like driving, don't you think it is risky to drive on the road if you haven't learnt how to drive properly? If you know the right way to do it, you can reduce the risk significantly.
4. Invest in few great companies
Most investors are taught to "diversify, diversify, diversify". Therefore, they bought into many mutual funds and keep small holdings in many stocks. Warren Buffett thinks diversification is for people who don't know better. By investing across the market, you will go up and down with the market. The key to outperform the market is to identify great companies and focus your investments in them.
5. Make decisions base on strict criteria
Many investors make decisions based on emotions. They are tempted when they learn of hot tips or see their friends making quick profits. Then they sell immediately when they see stock price tumble the next day. Successful investors follow a set of strict criteria to determine when to buy and sell. Investment criteria are rules that you follow to decide what stocks to buy, when to buy and after buying, when to sell. Here are some examples: the company must have increasing sales and profit for the last 5 years, return of equity must be more than 15%, long-term debt must be less then 3 times of net profit, etc.