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4 Relevant Lessons for Stock market from Warren Buffet

4 Relevant Lessons for Stock market from Warren Buffet

Warren Buffet had mentioned about these important points for picking stocks in the year 1965 in his annual newsletter. The most surprising fact about these points is that it is relevant even after 56 years. All through these years he had picked few dozen companies and all had gone through these simple points.

In these many years, the US market has gone through inflation, Vietnam war, Gulf war, change in the world currency to Dollar, recessions, IT bubble burst, mortgage crisis resulting in Great Recession & Corona crisis in 2020. Anyone going through so many crises would have changed their approach in picking stocks as i.e due to experience gained.

When it comes to Buffet he has stuck with these points while picking stocks till now and Charlie Munger his close friend also goes by these points.

The 4 important points to investing are:

  1. Invest, only when you can understand
  2. With favourable long-term prospects
  3. Operated by honest & competent people
  4. Available at attractive price

The biggest difference between Great depression in 1929 and corona crisis in 2020 is the reaction of governments pertaining to the problem. During 1929, the US Government took several years to react, and they reacted in few months during the Great Recession, 2008. In 2020, unexpectedly all the governments reacted in few days, which resulted in quick money supply and entire stock market across the world has gone up drastically.

Every time whenever there is Euphoria, everyone will feel and say that, “This time it is different…”. This phrase is coined by Sir John Templeton.

This time, some common reasons are “Informed Investors” & “Global liquidity”, which can never fail or come down.

In India, we had few stock market downfalls to remember which occurred in 1992, 1999, 2008 & 2020. Except 1992 Harshad Mehta scam all were due to external market conditions.

Whenever there is a fall, there will be majority of people who will lose a lot of money and they will never come back. During the next rise and fall it is the next generation of people who jump in again to make more money and again they go through the same process.

Stock Market is an emotional roller coaster ride.

Last month when the market corrected in small and mid-cap space this happened. I regularly run a club in clubhouse and he was a regular listener. One day he messaged regarding market condition and said that he is at huge loss. Before I was about to respond regarding those stocks within next 30 minutes, he exited the position by booking 15% loss. If you are not able to withstand 15% losses, then it means you didn’t do your homework before investing.

Most of the time, our mind will try to connect the dots and try to prove us that we are right. For booking losses, he said that he is sitting in huge profit in mutual fund and didn’t want to lose beyond this level in stock market.

Finally, he gave up and said that, “Sir, I couldn’t control my emotions of selling my stocks”.

This small fall may be a temporary blip but what if the market falls slowly over several months in the future. There are so many factors which say that Indian market is riding so high without the real economy moving nowhere.

Some of the pain points are impact of COVID-19 on unlisted companies, several job losses in Hospitality sector, private expense is not picking up etc. Market is moving with the only euphoria that Listed companies are not showing impact of COVID-19 and even showing better quarter results.

Finally, Market to GDP ratio is at all time high which is one of the warning signs of Buffet in stock market. India is having this ratio at 122% which is a 13-year high and last time in 2008 it went up to 150%. Local conditions were lot better during that time.

Even after all these discussions, one of the common questions I hear in my Facebook groups and clubhouse is that

“Can I invest now?“– I hear you, as you read through till now here.

Whatever the market condition is, follow the 4-point rule of investing. If you are not able to find, sit with cash like our beloved Buffet until that time.

About the Author

Ganesan Thiru is an Author, Stock Market Profit coach, Research Analyst who has trained more than 10,000+ people in stock market investments & had done 90+ webinars in the last 15+ months He has 1800+ people in his Private Facebook group “Unlimited Wealth” & active in social media. His mission is to inspire one million people in getting financial freedom.