Investing can be intimidating, but it's an important part of personal finance. Legendary investor Warren Buffett summarizes the basics of investing in his annual shareholder letter.
An excerpt from Buffett's letter includes five main principles of investing:
- Keep it simple and steady: "When promised quick profits, respond with a quick 'no.'"
- Focus on the big picture: "Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on."
- Don't speculate: "Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it."
- Don't obsess over the small picture: "Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays."
- Market predictions are a waste of time: "Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important."
Buffett's letter includes practical advice to get started, too. Personal finance site 20 Something Finance summarizes his main tenets:
- "Evaluate and know the present and future value of what you are purchasing"
- "Look for opportune times to buy"
- "Hold when everyone else is selling"
- "In general, use other people's manic behavior to your benefit"
Buffett also suggests how to allocate:
"My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will… Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's. (VFINX))."
These are the basics of Buffett's investment rules. If you want more details, check out the excerpt at the link below.
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