Wednesday, April 23, 2008

Important Investment Tenets

1. According to Warren Buffett, invest only in a business you understand, and not in companies you hear about at the hairdressing salon or at parties. If you don't know what the company does, then don’t invest. It's your hard-earned money. Do a little homework and research on the company in which you are planning to invest. There’s a plethora of free information and tools on the web to help you.

2. Buffett also believes in buying cheap. Sometimes the notion of cheap and expensive in the stock market is far from clear. In a bull market, the value investor could easily find himself or herself with nothing to buy. But opportunities are always out there. Think about it, if you shop around for the best prices on most things, why wouldn't you do the same with your investments?

During a period of stockmarket decline, Buffett was quoted as saying:

"I find nothing frightening about it at all. If I own a good business, I don't really care whether the markets open tomorrow …. I have no idea what business is going to do next month or next year ….. I don't think it's important whether you're confident about tomorrow or next week."

Buffett’s confidence comes from taking a long-term view of the economic fundamentals:

"If the economy does well over a long period, markets will do well over a long period. In the short run, the market's a voting machine and sometimes people vote very unintelligently. In the long run, it's a weighing machine and the weight of business and how it does is what affects values over time."

Moral of the story: Learn to buy a stock like you are buying the entire business. Do not let market emotions overcome you, and buy on the assumption that the stock market is going to be closed for the next 5 years.

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