The US employment report for August, released on Friday (September 6th), once again sparked concerns about the economy cooling down and the Federal Reserve’s pace of economic recovery being too slow. The uncertainty about whether the US economy will enter a recession has led to market turmoil, leaving novice investors feeling more lost. Fortunately, legendary US investor Warren Buffett has offered seven pieces of advice to guide novice investors on how to invest.
Buffett, known for his legendary investment career, has inspired generations of investors. According to Bloomberg, Steven Blitz from independent research firm TS Lombard stated that the August employment data continues to paint a picture of the economy nearing a turning point. “Whether the economic turning point will morph into a recession or develop into a scenario with less negative impact depends on how actively the Federal Reserve responds to the current negative trend. Will the Fed cut interest rates by 25 basis points or 50 basis points?”
The uncertainty surrounding the health of the US economy is impacting the entire market. Following the release of the employment report on Friday, the stock market experienced turbulence, with the S&P 500 index falling, marking its worst week since March 2023.
CNBC quoted Charles Ashley, portfolio manager at Catalyst Capital Advisors, saying, “The entire market is seeking direction, and that will come from the Federal Reserve.”
In such a scenario, how to invest is a major challenge for every investor. Buffett’s expertise can help experienced investors elevate their portfolios to a new level, while his fundamental investment principles are also worth learning for novice investors.
Buffett became interested in stocks at a young age and bought his first stock at just 11 years old. The world’s greatest investor has always adhered to basic principles or investment rules, which have greatly benefited him throughout his long and successful investment career.
Here are seven principles from Buffett that every novice investor should know, as summarized by GOBankingRates.
Investing is about allocating funds to ensure higher returns at appropriate rates in the future. However, for Buffett, investing has never meant simply buying stocks but acquiring partial ownership in reputable, well-operated companies. When Buffett started looking at investment problems in this different way, everything else fell into place.
GOBankingRates suggests that novice investors heed his advice and focus on companies with sound fundamentals, such as strong profits, low debt, and well-managed operations, rather than those inflated by speculation.
Understanding the revenue-generating methods of the companies or assets you’re investing in is crucial according to Buffett. If you don’t know how a company generates revenue, it’s challenging to predict its future success.
For novice investors, it is crucial to invest in industries or companies you are familiar with or spend time researching them before investing.
“Never invest in a business you cannot understand,” says Buffett.
As mentioned by Hamish Hodder, co-host of the Young Investors Podcast, in a YouTube video, Buffett has followed a principle of Berkshire Hathaway for over 60 years: to avoid permanent capital loss by steering clear of high-risk investments that could lead to significant economic losses.
While some losses are inevitable, it’s essential to avoid absolute bankruptcy, which could force you out of the investment game forever.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” This famous investment wisdom from Buffett is often quoted by potential investors but seldom followed.
Buffett believes that if you don’t have the time to analyze stocks and cannot be an informed fund manager, you should opt for diversified investments (usually in exchange-traded funds [ETFs]). However, if you have the ability to analyze and truly understand the companies you’re investing in, hold no more than stakes in six companies.
“If you really understand businesses, you probably shouldn’t own more than six of them. If you can identify six wonderful businesses, that is all the diversification you need. You will make a lot of money, I guarantee you. Investing in a seventh rather than putting more money into your first is a terrible mistake,” Buffett said.
Buffett acknowledges that past mistakes and hesitations have come at a heavy cost but is more concerned about the future. There is much to learn from mistakes, but don’t let them hinder your progress and goals.
While economic turbulence and interest rate fluctuations are important, for Buffett, they are only critical when they affect his “knowable” view of investing in companies or his “circle of competence.”
In general, investment decisions should be based on a company’s value or reasonable future valuation analysis and not on emotional or insignificant factors.
Buffett advises novice investors to focus on companies with solid fundamentals rather than those inflated by speculation and to continuously evolve and compound their investments over time through long-term holdings in such companies.
In his words, “I’m looking for a business that is easy to understand, with a good current economic moat, honest and capable management, and I can roughly see where they will be in ten years. If I can’t see where they will be in ten years, I don’t want to buy.”
(The content of this article is for general information purposes only and does not constitute any recommendation. Epoch Times does not provide investment, tax, legal, financial planning, or other personal finance advice. For specific investment matters, please consult your financial advisor. Epoch Times does not bear any investment responsibility.)