Monday, October 26, 2009

Why Warren Buffet Makes Money and You Don’t

via Trakin' the india business buzz by Arun Prabhudesai on 10/25/09

Yes, You. For the matter it includes me too but the title seems catchy that way !

Jokes apart, what is it that out of so many people invested in the Stock Markets only a few make a real fortune out of it? As a matter of fact, barring Mr. Rakesh Jhunjhunwalla I don’t think there is any self-made millionaire in India who made his fortune via the Stock markets (probably very few unknown others).

Does it mean that the others are ill equipped or the luck isn’t in their stride. No, because there are those Ivy League experts who are adept at number crunching like anyone else, yet they don’t ride the Stock Markets. Luck can be a factor but then not matter how clichéd it sounds,

“Fortune favors the brave”

When we are talking about Stock Market Riches, the Oracle of Omaha – Mr. Warren Buffet’s name has to be taken in the same breath. The world’s richest man sits on the top of the world having made him a fortune investing in stock markets over a period of time. What’s more, he has done it for millions of his shareholders as well, invested in Berkshire Hathaway.

Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by 2005

The marketplace is abuzz with Buffet’s investment principles with dozens of books and millions of citations on the Internet. But, then we haven’t seen anyone come remotely close to the fortunes that Mr. Buffet has made.

Technical and Fundamental Analysis apart, there are some very simple yet important principles which are highlighted in Mr. Buffet’s Investment rationale.

Never invest in a business you cannot understand

Sound simple. The philosophy is so profound yet how many of us tend to avoid it. One look at his portfolio and the statement makes all the more sense .Coca-Cola, Nike, Procter & Gamble, J&J. The business intricacies apart, the companies make products we can all relate to and probably use them too on a regular basis.

Risk can be greatly reduced by concentrating on only a few holdings

How many of us have heard, “Never put all eggs in one basket” or Diversification is the key to effective investment. But, then aren’t we culprits of over-diversification at times. I remember holding 17 stocks in my portfolio at one time. Over diversification leads to dilution of possible gains and it is difficult to track 17 companies at once.

Mr.Buffet’s portfolio has a list of 41 stocks. It may sound too much, but then he has accumulated them over years and has hundreds of people managing his investments now.


This single word is the game changer of sorts. This virtue alone separates the likes of Mr. Buffet, Peter Lynch from the average Joe. The explanation for this is best understood in terms of Mr. Buffet’s principles itself.

  1. Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years
  2. Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market
  3. The advice “you never go broke taking a profit” is foolish
  4. Buy a business, don’t rent stocks

The quotes speak for themselves; invest in Stock Markets to become a co-owner and not to make profits out of fluctuations.

It would be wrong to say that these 3 are the principles that made Mr. Buffet his riches. A lot of research and number crunching is responsible for Mr. Buffet buying stocks at a “Fair” price or on the basis of intrinsic value which the whole world is trying to figure out. But these are some no-nonsense jargon free fundamentals that can go a long way in ensuring a long term healthy investment portfolio.

I would like to know from Stock Market Enthusiasts out there – Do you think that if you stick to these 3 principals of Mr. Buffet, you will make money in Stock market?

[This post has been written by our regular contributor Ankit Agarwal, an ERP Consultant by profession, a wannabe entrepreneur and stock market stalker by passion]


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