Learn to invest with Buffett

Chapter 67

Chapter 11 Section 2 Buffett's success rules for concentrated investment

Concentrating on stocks of excellent companies that investors know well is much less risky than diversifying among stocks that many investors don't know much about.

--Warren Buffett
We have already known the advantages of concentrated investment and some methods of Buffett's concentrated investment. Here we will discuss in depth the success rules of Buffett's concentrated investment.

Buffett's success rules for concentrated investment:

1. Identify great companies

The basis of this principle is the common sense that the intrinsic value of a well-managed company whose managers can be trusted will be reflected in its stock price.Therefore, the task of investors is to do their own "homework" and find those truly excellent companies and excellent managers among countless possibilities.To apply this principle to business, what we need to do is not to seize all possible market opportunities like most people do when buying stocks, but to patiently and meticulously find out our "most outstanding market opportunities" , and then work hard.Every opportunity has a price, just like after buying one stock, you don't have enough money to buy other stocks.Only some big opportunities are worth your investment.

2. The less you invest in individual stocks, the better
Buffett believes that for an ordinary person, as long as there are three companies' stocks, it is enough.His reasoning is also based on common sense: the more stocks you buy, the more likely you are to buy businesses you don't know about.Usually, the more you know about a company, the more you pay attention to a company, the lower your risk and the better your return.Applied to enterprises, it is to concentrate and focus on a few areas where you have the most advantages, instead of blindly diversifying in order to reduce risks.In fact, Buffett has seen many companies waste the money earned in diversification after relying on focus to obtain the first pot of gold, and finally return to the starting point.

3. Invest heavily in promising individual stocks

When you firmly believe that you have encountered a great opportunity that is elusive, the only correct way is to invest heavily.This is also based on a common sense: when a thing is likely to succeed, the more you invest, the greater the return.Buffett believes that good entrepreneurs also have such qualities, that is, they will concentrate their efforts to make breakthroughs after seeing the direction, instead of spreading their resources for insurance in the usual way.To be an entrepreneur requires the courage to know and act.

4. Be patient
Buffett has a saying that an investment shorter than 5 years is a fool's investment, because the value of a company is usually not fully reflected in such a short period of time, and the little money you can make is usually divided up by banks and tax bureaus.Similarly, to be a business, you must have patience.Only 20% of the start-ups in the world can persist for more than 5 years, but usually the enterprises that persist have good returns.

5. Don’t worry about short-term price fluctuations
Buffett's theory is that since an enterprise has intrinsic value, it will definitely manifest itself, and the only problem is when.And no one in the world can predict what kind of stock price will be at what time (in fact, Buffett never believes in the so-called market/stock price forecast, the only thing he believes in is what we can grasp, that is, the understanding of the company) .

Investment motto:

By conducting detailed inspections of listed companies, and then selecting the best among the best, the main funds are invested in a few stocks that can generate higher returns. This is the core of Buffett's concentrated investment philosophy.On the basis of detailed inspection of companies, investors should also follow the principle of "making money without effort" and try to find and explore industries and companies that "make money without effort".When this kind of stock appears, we must seize the opportunity and concentrate our investment.

(End of this chapter)