Investment - A Tribute to Warren Buffett

 

First and foremost I would like to make it very clear that I am not an investment guru. I am just a prudent investor who tries to find opportunities to make money legally over the years and took action when I found it.

If you know me personally, you know that I'm just a normal next door girl. Nothing extraordinary. A simple girl with simple tastes and a simple lifestyle.

So for this chapter I will simply let you know the investment principles that I try to live by. You then have to decide yourself which investment principle suits you and do research to determine which type of investments you wish to do.

There are a few property investment gurus that I admire such as Robert Kiyosaki and Malaysian born, Azizi Ali. I've read their books and love the knowledge and the ideas that they shared with the readers.

I am however a great fan of Warren Buffett. A bit odd actually because I don't invest in shares! But I find him truly inspirational.

He is a billionaire who drives his own car, does his own taxes, and still lives in a home he bought back in 1958 for $31,500! I think it was his simple unpretentious lifestyle that endears him to me, on top of his brilliance of course!

Note: From this point onwards, Warren Buffett's quotes are in bold.

Warren Buffett's number one rule of investment is "Never lose money" and his number two rule is "Never forget rule number one". Don't you just love the guy?

The first principle that I subscribe to is "never invest in a business you can't understand". A logical statement that a lot of people unfortunately refuse to take heed.

How many of us are guilty of investing in something just because somebody you know did it? As I mentioned earlier, you should not buy a house just because your BFF bought one.

Please keep this in mind, it is easier to make money in something that you know than in things that you are not familiar with. If you're interested in property investment, make sure you learn everything about it before you put even a cent of your hard earned money in it.

Likewise if you wish to invest in shares or unit trusts.

If after all the effort you put to learn about it, you still can't understand how it works to ensure that you will never lose money (remember Buffett's rule number one), then avoid it at all costs.

Second principle is "start small". This is to build up your confidence. Once you are familiar with how the investment works then you can grow your portfolio. Remember "risk comes from not knowing what you're doing."

Third principle is "believe in yourself". Don't let anybody convince you that you are not smart enough to make tonnes of money. As Warren Buffett aptly said "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."

"I always knew I was going to be rich. I don't think I ever doubted it for a minute." Listen to the man!

Fourth principle is "be passionate". "Without passion, you don’t have energy. Without energy, you have nothing."

Please keep this mantra alive in your head: "plan without action is worth nothing".

Fifth principle is "do not be overwhelmed by greed". "Be fearful when others are greedy". If the return is too good to be true, chances are it is. So steer clear!

Sixth principle is "good discipline". Remember always that "Only when you combine sound intellect with emotional discipline do you get rational behaviour". Even the best laid plan will go awry if you do not have discipline to follow it through.

Seventh principle is "patience". "Someone's sitting in the shade today because someone planted a tree a long time ago".

Always remember that "no matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant."

Nothing good will come easily. If getting rich is easy, everybody will be rich.

Eighth principle is "keep it simple". If your investment gets too complicated, stop for awhile and think. Is it really complicated or it is just me who made it complicated?

"There seems to be some perverse human characteristic that likes to make easy things difficult." Make effort to simplify it. It is easier to manage non-complicated stuff.

Ninth principle is "monitor your investment closely". According to Mr Buffett, it is not necessary to diversify your investment extensively thus making it complicated to manage.

"Diversification is protection against ignorance. It makes little sense if you know what you are doing". You can stick to a few investments that you are very good at but you must keep an eagle eye on it.

"Keep all your eggs in one basket, but watch that basket closely."

Tenth principle is "get the low hanging fruits" first before you even think of going for complicated investments.

 

"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

Eleventh principle is "always on a look out for the best value". "Price is what you pay, value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down".

You must however know the difference between "good value" and "too good to be true value". The former is to be embraced, the latter is avoided!

 

Twelfth principle is "learn from your mistakes and know when to cut your losses". "In the business world, the rear view mirror is always clearer than the windshield".

Sometimes we get emotional attachment to a certain investment. We like to believe that in time the investment will improve. This is Mr Buffett's advice if you were caught in that situation "The most important thing to do if you find yourself in a hole is to stop digging".

Cut your losses and bail out! "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks".

Thirteenth principle is "be very careful from whom you get your investment advice from". Only get advice from more successful people than you. "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway".

Never ask advice from people who wants to sell you something. "Never ask a barber if you need a haircut."

Sometimes you will encounter people who answer you with no answer. You can feel it in your gut that they don't really want to help you but are too polite to say no to your face, so they go round and round the bush. "Honesty is a very expensive gift. Don't expect it from cheap people."

Fourteenth principle is "surround yourself with positive people". "It’s better to hang out with people better than you. Pick out associates whose behaviour is better than yours and you’ll drift in that direction."

Avoid whiners and complainers like your life depended on it!

Finally, you must “know your strength and weakness”. If you have weakness in following through with plans, then do something drastic to fix it.

 

"Chains of habit are too light to be felt until they are too heavy to be broken."

There are thousands of books written about investments. Read books, blogs and ask successful people. Arm yourself with knowledge. More importantly - take action!

"Writing a check separates a commitment from a conversation."

Good luck in finding your right kind of investment.

Remember that "you only have to do very few things right in your life so long as you don't do too many things wrong".

So go and find your Mr Right!

Compound Interest - Your New Best Friend

 

In the previous chapter I have covered the subject of interest rate. Yes, one of the most hated things on earth. Who wants to pay extra huh? Those wretched banks!

Please remember however that there are always two sides of the same coin. If you borrow, you will pay interest but if you invest, you will receive interest, dividend, profit or whatever name that you wish to call it.

The bottom line is still the same - everybody wants to make money.

 

Banks, businesses, government agencies, YOU. Nobody wants to lose money. So don't hate them so much. Some of them are actually your friend.

Now I will introduce a new concept called compound interest. I keep on repeating that if you wish to be financially free procrastination and time are your greatest enemy.

This is why. Compound interest is time dependent. The longer time you have the better it is for you.

 

Compound interest arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.

Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding).

Compound interest is standard in finance and economics, and simple interest is used infrequently.

In the investment world, compounding is your new best friend.

Do you know that if you have $10k now and put it in a fund that gives 8% p.a. return year-on-year in 10 years time that $10k will be $21.6k and in 20 years it will be $46.6k? If it is 10% p.a. then it will be $25.9k and $67.3k. You don't have to do anything, just leave it there.

This reminds me of my late grandma's unit trust account. A few years ago, while cleaning up I found her old unit trust book. Inside her account there was $20 balance.

The last transacted date was in the late 80s. When I updated my unit trust book, I asked the bank officer to update her book as well, just in case there is still some balance left.

I was not expecting much but was pleasantly surprise to find that a mere $20 after 30 years became $3.2k! Imagine if that $20 was actually $2000. $320k is no joke! Unfortunately it is not.

The point that I'm trying to make here is start your savings early. When it comes to generating wealth, it doesn't matter how much you earn. What matters is how much you save.

If you earn $5k a month but you spend $5.5k every month, you are doomed to work for the rest of your life.

But if you earn $2k a month but you save $1k every month, believe me you have a very good chance of making it.

"Good habits once established are just as hard to break as bad habits and bad habits are easier to abandon today than tomorrow. So what are you going to do about it?"

― Lucas Remmerswaal

 "Good habits are the basic tools that will determine whether you are a tortoise or hare in life!"

― Lucas Remmerswaal

When I was in secondary school, there were surveys done every few years to check our level of savings. Our class teacher will ask for our savings book. My teacher always wonders how come the poorest student (me) has the most savings!

It was no great mystery actually. I just saved everything since primary school days. Money that I got during celebrations or special occasions were mostly saved instead of spent on toys.

When I was in university, the same basic formula was used. I will try to save most of my scholarship money. During holidays, I will work part-time to increase my savings.

During my early working life, you guessed it right! The same basic formula was used. I will try to save as much as possible.

During those early days, there were very few luxuries in my life.

When my fellow students were complaining about the "quality" of hostel food (that we had prepaid at the beginning of every semester) and would rather fork out extra money to buy and eat something else, I was wondering how could a proper meal of rice, chicken/beef/prawn, vegetables and fruits be worse than an oily plate of char kuey teow that they love so much?

I suppose that is a malady of rich kids.

When you embark on this journey, be prepared to be called offensive names. Cheapskate is one of the nicer ones! Just persevere. You have a mission. Nobody is going to sway you from it! Fighting!