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How Warren Buffett made his billions. 7 tips

Last updated on: May 11, 2010 19:18 IST

How Warren Buffett made his billions. 7 tips

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Warren Buffet is known as the investor with 'the Midas Touch'.  Buffet is the most successful investor alive -- the only member among the Forbes' list of the world's richest people to have earned his fortune entirely through investing. Every investor can profit from Buffet's investing strategies...

Investing calls for much the same qualities as those required to become a first-class ballet dancer or concert pianist.

1. You have to want to do it enough to overcome the difficulties. I know lots of aspiring writers. Without doubt one of the biggest differences between the ones that make it and the ones that don't is simply that the successful ones have the drive to win through in spite of all the frustrations.

For something that you desperately want to do, the difference between the professional and the amateur is often just that the professional will work terribly hard and keep at it.

Although great investors are almost always rich, they rarely live in a grandiose way during their most successful period, or form collections, engage in public works, or pursue arts or sports.

The great investor, like the great chess player, is determined to become a master of that particular craft, sometimes without caring whether he only gets rich or immensely rich. It has been rightly said that the reward of the army general is not a bigger tent but command. It is, in other words, succeeding in the process itself that fascinates the greatest investors.

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Image: Billionaire financier and Berkshire Hathaway chief executive Warren Buffett poses on a motorcycle during the Berkshire Hathaway Annual Shareholders meeting in Omaha, Nebraska.
Photographs: Carlos Barria/Reuters
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2. Closely related to this is originality. Many if not most great artists are innovators. Shakespeare, for example, coined thousands of words.

To succeed in investing requires a vigorously independent turn of mind, and indeed often an element of perversity, since the money is made by doing the opposite of the crowd at key points.

To pull off a great investment coup it is best to be the only substantial buyer of a stock in which you are building up a position.

Napoleon observed that one good general was enough for an army, and rarely held councils of war. Similarly, committee investing is almost always mediocre investing.

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3. However, you should not invest unless you are sure of what you are doing. Since there will be some things that you can buy with certainty, why bother with those that you cannot?

Only if you are perfectly certain that you are right will you have the confidence to buck the opinion of the crowd at the critical moments; only then will you make your fortune.

4. If possible, be flexible about buying stocks in different industries, always subject to the criterion that you know your facts for sure.

5. Only buy a stock the way you would buy a house that you intended to live in. You should understand it well enough and like it well enough so that you would be content to own it in the absence of any market.

Buffett finds it useful to write down the main reasons why a stock should be attractive and then contemplate them; once he has considered a case for a time, he makes up his mind, and that is that.

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How Warren Buffett made his billions. 7 tips

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6. Be thorough, cautious, and risk-averse. Remember Buffett's two key rules for successful investing:

Rule No. 1: Never lose money.

Rule No. 2: Never forget Rule No. 1.

7. All this requires energy and determination. That is why the investor should have the same quality Buffett insists on in management: dedication to the job.

He talks of his one-line employment form, whose only question is, "Are you a fanatic?" Great investors, Buffett included, always are.

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What makes a bad investor

1. The unsuccessful investor is usually the opposite of the successful one. He does not have the qualifications or the mentality or the interest to do his homework, and flits from one titillating story to another like a butterfly.

2. He is excited by the emotions of the crowd, buying hot ideas near their tops and being flushed out in despair near bottoms - what Buffett calls "fashion investing".

3. He doesn't know what a business is really worth, so he can't determine for sure whether he is paying a fair price for it.

4. He has a high turnover in his portfolio.

5. He thinks of a stock as a thing to bet on like a racehorse, rather than what it is - a share of a business, whose fortunes derive from the success of that business.


[Excerpted from the book, The Midas Touch: The Strategies that Have Made Warren Buffett the World's Most Successful Investor. Published by Vision Books.]

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