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The Buffett Effect: Three billion dollar secrets every South African investor must know

by , 01 April 2016

When Buffett bought Berkshire Hathaway in 1965 for about $12 a share, it was a textile company and one of the largest employers in New Bedford, Mass. It then quickly became Buffett's acquisition vehicle.

With years of incredible growth behind its name, the company now sits at a stock price of $210,200.

It's no secret that Warren Buffett is one of the most successful investors the world has ever known. It's definitely not a secret that he's earned billions of dollars investing in the right stocks, at the right time.

And I'm sure there's no denying the fact that he created an unbelievably successful investment strategy that has been the pinnacle element to his billion dollar fortune.

But it's not only Buffett's investment strategy that's been the main source of his success. Buffett has also beaten the market by following these three-billion dollar secrets.

Let me explain…
 
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Buffett billion-dollar secret #1: Always keep cash handy for protection and potential opportunities

A successful investor isn’t one who’s having sleepless nights.

Buffett relates how Berkshire “will always arrange affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity…

When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier of liquidity and capital to the system, not a supplicant. We pay a steep price to maintain our premier financial strength… But we sleep well”.

That last part is such a simple truth you risk overlooking it. Investments shouldn’t stretch your very strong argument to make a distinction between savings and investments. Savings are your sleep-well prescription: Sold, safe and extremely unexciting.

This is just one of the many reasons why diversifying your wealth is important – I want to sleep well!

The other point Buffett is making here is that a good spoonful of cash in your portfolio allows for great value opportunities to be exploited whenever they occur.

Buffett billion-dollar secret #2: The key to profits is ONLY invest in what you understand

Buffett made a great play at the turn of the century by refusing to join in the great dot.com mania. Why would he avoid such a potentially lucrative investments?

Because he didn’t understand the dynamics of what he called the “new paradigm”.
 
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In his letter to shareholders in the midst of the dot.com boom, he announced that Berkshire had invested in a paint company.

In 2010, he revisited the point. He said: “Charlie and I avoid business whose futures we can’t evaluate no matter how exciting their products may be.”

The point?

It’s much simpler for you to invest in what you fully understand. Do your own research, rather tham relying on ideas and advice from financial advisors and investment ‘gurus’.

And Buffett cautions investors about who to ask for advice from advisors who have strong financial interest in you or something that generate large fees.

All you have to remember is add to your winners, keep some rainy day money, be brave enough to go against the mainstream at times of tension and take independent, unbiased advice.

Buffett billion-dollar secret #3: There’s nothing wrong with being a “black-sheep” investor

Warren Buffett is famous not only for his long long-term view of investment, but also for his contrarian take on investments.

His most often-quoted bit of advice is to be “fearful when others are greedy and greedy when others are fearful”.

In February 2009, Buffett has a chance to act on his own advice. He noted that corporate and municipal bonds were ridiculously cheap compared to US government bonds. But even he didn’t go far enough in his contrarian investing. In his address to shareholders, he said: “We backed this view with some purchases, but I should have done far more. When it’s raining gold, reach for a bucket, not a thimble.”
 
A simple rule of thumb will help you with that. When a stock market or currency action makes the front-page headlines (rather than the business section headlines) in the daily news, it’s time to act in the opposite direction. 

Knowledge brings you wealth,


Joshua Benton
Managing Editor, MoneyMorning

P.S. I’ve spent years learning and applying the Buffett method to picking stocks for my Unconventional Millionaire Stock of the Month portfolio. And what I’ve found is nothing short of spectacular – 4 stocks, 4 winners and a combined return of 1,384% in just 5 years.

Now using the exact same Buffett-Indicators, I’ve unearthed a little-known, almost invisible company that could give you a 55% return in 12 months’. Click here to get your hands on all the details.



The Buffett Effect: Three billion dollar secrets every South African investor must know
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