Veteran investor Warren Buffett has a number of thoughts that would be a shame to miss. His thinking can be useful for improving investors' financial performance.
Every year, Buffett issues a letter addressed to Berkshire Hathaway investors. In it, he provides a glimpse into his thoughts on financial markets. Although usually associated with professional investing, Buffett's thinking often relates to how an individual can better manage money.
1. Me, myself and I
In 2008, Buffett noted that he ran the company carefully and always with more than enough cash. We would never want to rely on the kindness of strangers to meet future obligations. "From a personal finance perspective, this can be interpreted to mean, in uncertain times the only person you can rely on financially is yourself. These are Buffett's words of wisdom about planning and preparation.
2. Prepare for a "rainy day"
In 2010, Buffett cited a 1939 letter from his grandfather Ernest to his uncle Fred, Ernest's youngest son. The letter talked about the US$ 1,000 prize money and the importance of saving money to use in emergencies. Buffett used the letter to explain the importance of rainy day money or quick access to cash to use when needed.
3. Beware of bubbles
In 2011, Buffett urged investors to be careful about investing on a "bandwagon" basis. This is a condition when investors come in to buy assets, thereby pushing share prices too high. He highlighted the dot.com boom and US house prices as examples. Of course, before they pop, bubbles are notoriously hard to spot.
4. Now is the time
In 2005, Buffett said "when there are problems, whether in personnel or in business operations, the time to act is now." A quick response is better than trying to pretend the problem doesn't exist.
5. Use the 50 year rule
Before investing in a company, ask yourself whether the business will still be thriving in 50 years. This is why Buffett has historically avoided technology stocks. A number of sectors that can be looked at include foodstuffs, housing, insurance and banking services. All of them will be in demand for decades to come.
On the other hand, will people still need laptop computers in 2065? Maybe, but maybe not
6. Take advantage when the market misrepresents good companies
Buffett's investment philosophy is based on the idea that there are bargains in the stock market waiting to be discovered. For example, when all bank stocks were hit by a sell-off during the financial crisis, Buffett instead bought bank stocks that he believed would survive and thrive in the long term.
7. Understand what you are buying
Back in 1992, Buffett emphasized he only invested in businesses "that only he could understand." Knowing what you are buying and how investments work is very important. Being tempted by promises of high returns on products that are not easy to understand can be a recipe for disappointment or even worse.
8. Money is not everything
In 2010, Buffett got personal when highlighting his top three investments. The best two are the wedding ring followed by the family home. "For $31,500, I paid for my house, my family and I got 52 years of wonderful memories with many more to come."
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