The world’s most successful investors could not get to where they are today without a deep understanding of how markets work.
According to him, the most important rule in the market is not to lose money. The second law only reinforces the first.
In this testament you can find a timeless piece of market knowledge…
If you lose 10% in stock (decline from 100 90) So you need to make 11% profit (profit from from 90 100) To get back what you have lost.
To cover 20% loss, you have to make 25% profit. To recover 50% of the damage, you have to double your money.
As they say in motor racing, ‘To finish first, you have to finish first.’
So don’t lose money. But how not to lose money in the market?
Well, Buffett follows the timeless wisdom of his mentor, Benjamin Graham, who taught him the importance of a ‘margin of safety’.
That’s what he said..
“The three most important words in investing are the margin of safety.”
The idea is to buy shares at a price less than its intrinsic value. It is the cornerstone of value investing.
Here is an article on how to find the intrinsic value of a stock.
By buying shares at a discount to their intrinsic value, you will avoid filling your portfolio with overvalued stocks.
Instead, the stocks in your portfolio will have a low valuation that provides good downside protection. These are commonly called value stocks.
But in order to do that, you need to find out what the value of a business is, that is, its intrinsic value.
In fact as Buffett said, the only two things you need to know about making money in stocks are how to value a business and how to think about stock prices.
But what about stocks in a market crash? Should you buy more? Sell? Or just wait?
What does Buffett have to say?
Here’s a Buffett quote that’s quite accurate…
“If you’re not thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes”.
By this Buffett is saying, if you are in the market for short term trading, just stick to it. Don’t even think about becoming an investor. A true investor is a long term investor.
Here’s another quote that’s classic Buffett…
“Only buy something that you’re perfectly happy to hold if the market closes for 10 years”.
For more details on this read Equitymaster’s article – 10 rules for successful long term investing,
A market downturn is inevitable. They will happen. Like a downtrend in the market now. So be ready for them.
During these downturns, look for ways to capitalize on the opportunities the market offers you. Invest in stocks of your favorite companies which are traded cheaply.
Buffett here…
“There will be occasional major market declines – even panic – in the coming years that will affect almost all stocks. No one can tell when these shocks will come.”
And that’s absolutely right. No one can predict the downturn in the market. We can learn from them. We can be ready for them. We can take advantage of them.
Buffett uses market corrections to aggressively buy stocks. He sees them as ideal shopping opportunities. you should too.
The stock markets jumped wildly on the news. They go up and down on emotion. It is important not to fall into the madness of the market. Instead, stick to your homework and always be rational.
But what if you lose money?
It is natural to lose money in the stock markets. Everyone has to face loss at some point of time. There is no avoiding them. So you must know how to handle market losses.
A good way to do this is to clean up your portfolio. Stick to only fundamentally strong stocks and get rid of all the junk stocks.
Use the money raised by selling the poor quality shares to buy more of the good quality stocks.
That’s what Buffett has to say…
“Should you find yourself in an old leaking boat, the energy devoted to changing ships is likely to be more productive than the energy devoted to patching leaks”.
Don’t invest too much money in underperforming stocks. If the fundamentals of the company are not looking up, it is best to sell the stock and exit.
It is a difficult decision to make. If there will be some pain involved in losing money in the short term.
But accepting this loss would prove to be a wise decision. If you buy a more fundamentally strong stock, you will not only avoid further losses but also generate higher profits in the future.
You can use Equitymaster stock screener To find fundamentally strong stocks.
You can get started with us right away Warren Buffett Stock Screener,
(This article is syndicated from) Equitymaster.com,