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Everyone knows, or has at least heard of the name “Warren Buffett.”
Warren Buffett is probably one of the most successful investors of all time. He bought his first stock at a young age of 11, and since then, has grown his portfolio to over 110 billion dollars.
Pretty crazy, huh?
The reason why Buffett was able to grow his portfolio so much is that he started at such a young age. Compound interest takes a long time for it to take play, and Buffett was able to allow compound interest to build up since he started at such a young age.
In fact, did you know that Warren Buffett built 80% of his net worth after he turned 60? It’s true, but that’s how compound interest works. The more time you have, the better you’re off.
After all those years of successful investing, we can definitely learn a thing or two from Buffett himself. That’s what I want to share with you today.
I compiled some of the best investing advice for beginners from the man himself. Hopefully, you can take home with you some of the advice and apply them to your investments.
Without further ado, let’s dive into the best investing advice for beginners from Warren Buffett.
Stay the course and stay invested
The first piece of advice by Warren Buffett for beginners is to stay the course. The stock market is a volatile investment, which means that the value of stocks often fluctuates. This makes panic selling and buying a common occurrence.
Human beings are emotional. Overall, the goal of stock market investing is to buy low and sell high – buy a stock at a low price and sell it later once the price has gone up. However, our emotions often force us to do the exact opposite.
We buy high and sell low.
A stock usually gains popularity after it has already shot up in value. As word gets out that a stock’s price rapidly rose, others buy too in hopes they can catch a portion of the profits.
On the other hand, when the value of the stock drops, people holding the stock panic and end up selling. They sell to cut their losses short before they lose more money.
It’s all your emotions! When it comes to investing, emotions are your enemy. You want to be as unemotional and as rational as possible.
Once you create a plan for your investments, stick to it and don’t get emotional. If you plan to invest $500 into an index fund every month, stick to it no matter what the market does.
Learn how to enjoy market corrections
Talking about sticking to your plan no matter what the market does brings me to my next point: learn how to enjoy market corrections and bear markets.
A market correction is defined by the market losing 10-20% of its value, and a bear market is whenever the market drops more than 20%.
Warren Buffett has made it clear on multiple occasions that he likes it when the stock market drops. You may be asking yourself why the stock market losing value should be seen as a good thing, but let me explain.
Let’s say your favorite brand of shoes goes on sale by 20%, only for a limited amount of time. Would you buy the shoes?
Of course, you would. The quality of the shoes has not changed, only the price has dropped. Therefore, you’re getting the same quality for a lower price.
Now, let’s say the same pair of shoes goes up in price by 20%. Would you still buy them?
Maybe not so fast. You may think twice before making the purchase, and you might search for other better deals.
We should be using this same concept when it comes to stock market investing, but we don’t. We buy in stocks that have shot up in price, and panic sell after the stock price has dropped. That’s how you lose money.
Remember the concept of your favorite pair of shoes. If the price of the stock drops, but the business has not changed, why not buy more? You’re buying the same business for a cheaper price.
Learn how to enjoy market corrections and take it as a discount. Whenever market corrections happen, go on a shopping spree!
Dollar-cost average into index funds
The next advice Warren Buffett has for beginners is simply dollar-cost averaging into index funds. It’s the same thing he tells his wife to do after he passes.
An index fund is a pool of multiple different stocks. By investing in an index fund, you’re investing in all the stocks the index fund carries.
Investing in individual stocks takes a lot of work. It’s because it requires a lot of something called “fundamental analysis.”
Fundamental analysis is the act of studying the underlying business behind the stock. How does it generate revenue? Is the business profitable? How much debt does the business hold? Who are the business’s competitors and how well-established are they? Etc… etc.
There is so much that goes into fundamental analysis and it can be very time-consuming. You may end up spending hours every week just to keep up with your stock investments.
Not only that, but you’ll be going against professionals. Market/financial analysts are professionals who dedicate their whole careers to studying the financial markets. They have access to research instruments that cost tens of thousands of dollars. This leaves average people like you and me at a disadvantage.
So instead of investing in individual stocks, why not just buy the stock market as a whole that professionals tediously try to beat?
Start early and invest for the long term
Stock market investing is a long-term game. That’s why Warren Buffett suggests beginners to start early and stay invested for the long term.
The earlier you start, the less you have to invest to achieve more. Let me give you an example.
Trevor finds out about index fund investing at the age of 25. He immediately starts saving money and contributes his funds to his investment accounts. He manages to save $500 per month and does that until he turns 60.
When he turns 60, he will have a little over 1.3 million dollars!
On the other hand, Stanley found out about investing a little later in his life. He figures he should contribute double the amount of Trevor. He manages to invest $1,000 per month and continues until he turns 60.
When Stanley turns 60, he will have $619,525!
It’s crazy to think how although Stanley invested double the amount that Trevor did, his investments still fell short.
This goes to show how important time is when it comes to investing. The more time you have, the better off you’ll be at retirement. Not only that, but you’ll be able to take advantage of more market downturns (discounts).
Don’t follow the crowd
Just because many people are doing the same thing, doesn’t mean it’s the right thing to do. For example, many people splurge their money on shopping, but it doesn’t mean you should do the same.
According to Warren Buffett, the same goes for investing in the stock market. Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.” Just because the crowd is buying like crazy into a certain stock, doesn’t make it the right thing to do.
Think about this. Would you buy a certain expensive gadget just because other people are buying it? Would you trust the opinion of others with your hard-earned money?
Probably not.
You’d probably do your own research and see if it’s worth the purchase.
The same concept should apply to buying stocks. When you buy a stock, you’re buying partial ownership of the underlying business. Wouldn’t you want to learn more about the business before investing your hard-earned money?
In fact, many people with large followings run pump-and-dump schemes. This is where they buy into a small stock, hype it up, make others buy into it, then sell out. And when the stock loses its hype, everyone left holding the stock loses money.
Don’t follow the crowd. Due your due diligence before buying a stock.
Conclusion
Today, we went over some of the top advice for beginners by the best investor of all time, Warren Buffett.
I hope you can take home some of these tips to better your investing journey to financial freedom.
Thanks for stopping by and hope to see you again soon.
Want to learn about index fund investing? Check out my free tutorial on index funds!