From the master himself, five tips you can take to the bank:
1. Fear in others is an opportunity for you
Keep your head about you when others decide with fear and you’ll find value at every turn. From the common market thrashing over quarterly earnings to the small business owner who just wants to get out, learn to smell fear and welcome it as an opportunity. The irrational fear of the herd is a dear friend to the value-minded investor. When everybody else stampedes, quickly work through your own fear and get back to business.
2. Invest in what you understand
It doesn’t matter how good a deal you’ve found or how cool an investment opportunity seems. If you don’t understand how it works, steer clear. You probably have at least one friend who is always rushing from one “perfect investment opportunity” to the next. Unless you can afford to burn money in a barrel (which you shouldn’t), steer clear of investments that you don’t fully understand.
3. Maintain a healthy margin
For most individuals, the idea of even $5,000 in the bank seems like a far-fetched dream. Keeping 6 months worth of living expenses in a separate account is good personal finance sense. Holding enough cash to get you through times of uncertainty in your business has the same result of keeping you free of fear-based blunders. Figure out the number you need to keep safe in order to sleep well at night. Buffett needs his $20 billion, I need enough to pay for my friends’ drinks for a few months. What do you need?
4. Concentrate on long term results
Once you’ve put the first 3 tips into practice it’s important to remember that tremendous value is most often gained over the long term. Look at what might happen over the next 15-20 years and invest accordingly. You’ve got your cushion so you’re not afraid of dips in the market. You’re working within the bounds of what you understand well. You also have the ability to operate calmly when the rest of the world has gone nuts. Putting some focus on 4 tips should be no big deal for you!
5. Take full responsibility for your investment decisions
Make the success or failure of your investments personal and take responsibility for all your decisions. You might have the smartest consultant of all time but that’s no excuse to shirk your responsibilities. If something goes wrong at Berkshire Hathaway, Warren Buffett takes responsibility for the mishap and works to fix the problem as quickly as possible. He’s famous for treating the latest recession like a mother of 20 stocking up on groceries for 50% off. You probably won’t be in a position to purchase entire companies any time soon though. In the meantime, Get more of Buffett’s advice by perusing his annual letters to Berkshire Hathaway shareholders (quotes excerpted from 2009 letter). image Thanks to CNN Money for the tip! Subscribe via RSS here or follow Lifehack on Twitter here
