Warren Buffett is not a trader. In fact, he has advised people to avoid trading for many years. He is an investor who buys companies and stocks and then holds them for many years. In fact, he has owned Coca Cola (NYSE: KO) for more than 20 years.
He has for decades avoided Wall Street. However, for traders, there is a lot you can learn from Buffet. In this article, We will look at five valuable lessons you can learn from Warren.
#1 - Need for a Strategy
The first lesson you can learn from Warren is on the need to have a strategy. A trader who pretends to know everything is always wrong and chances are that they will end up losing a lot of money.
For more than 50 years, Buffet has always had a strategy for his investment. His strategy is based on the need to buy companies that are well managed and at a cheap price. He buys large stakes and at times, the largest stake.
As a trader, you need to have a strategy to follow for all your trades (and a trading plan). The strategy must not always be similar to what another person uses. You can define your own strategy and implement it.
#2 - Right Hand Man
The next strategy that has made Buffet wildly successful is his right-hand man. Charlie Munger has been Warren Buffet’s companion for decades. He has always been there when he is making major decisions. In fact, many have argued that Buffet would not be the man he is today if it were not for Munger.
A common saying advises people against being lone rangers. It advises them to combine efforts and make better decisions. Two hands are better than one. As a trader, it is important to have a right-hand team especially if you are doing it on a full-time basis.
If your life depends on trading, then you should get someone to help you with the analysis. The person should be invested in the trading as well.
» Related: Team trading vs solo trading
#3 - Role of a Mentor
Warren Buffett has talked about how his professor, Benjamin Graham influenced him to start investment. Graham was a leading scholar who had studied the market for years.
His book, the intelligent investor is one of the best-selling business books of all time. Warren became friends with him and guided him early in his career.
As a trader, having a mentor can play an important role in your career. It can help you avoid simple mistakes that would otherwise cost you thousands of dollars. A mentor should someone who has traded for years.
#4 - Staying Humble
If you are a successful trader, chances are that you will make a lot of money. If you follow the rules, you will be a wealthy man while you are still very young. However, you will start getting broke when you start showing off your wealth.
Warren is the best example of this. Even though he is the richest trader on earth, he still lives in a small 3-bedroom house. He does not own private jets and yachts. You will never see him show off. He understands that pride comes before a fall.
From this advice we can easily understand how to avoid overconfidence, which on the contrary can lead to terrible losses.
#5 - Give Back
One of the things that successful people do is that they give back. Warren Buffet has committed to give billons of dollars to charity. The same is true among most of the billionaires in the Forbes list. They understand that by helping the less fortunate, they are actually helping themselves.
As you become a successful trader, you should purpose to become a change agent in the society by giving back.
#6 - Trade what you know
An important lesson from Warren Buffett is that he mostly invests in things that he has a good understanding about. This includes value companies like Apple, Mastercard, and Goldman Sachs.
This lesson explains why Buffett has never been quick to invest in what is fashionable. He has resisted calls to form a venture capital firm like other companies. He also avoided investing in risky assets like cryptocurrencies and growth and unprofitable stocks.
This approach has indeed lost him a lot of money. But still, his returns have been average in the past few decades.
At times, he has invested in risky companies like Snowflake. But even so, he has invested a small amount of money in them. Therefore, as a trader, you should always focus on what you know and avoid following the crowd.
#7 - Be contrarian
Warren Buffett is a contrarian investor who is known for buying assets in depressed markets. One of his most famous quotes is about buying when everyone is fearful. This explains why he has held some stocks for more than 30 years. He also bought a lot of shares when the market crashed in 2020 and in 2008.
Traders should be like this. They should be ready to buy currency pairs when everyone is fearful.
#8 - Avoid too much leverage
Berkshire Hathaway is one of the most indebted company in the US. The company has more than $100 billion in debt. However, the company also has hundreds of billions in cash and the company has significantly high value.
The lesson is that you should always borrow wisely. In trading, this means that you should avoid too much leverage. Indeed, if Buffett was overleveraged, his company would experience a lot of pain in down markets.
There is a lot of lessons one can derive from Warren Buffet’s career. He has managed to steer Berkshire into a $700 billion company. We believe that applying some of these lessons from Warren Buffett will make you a better trader.
External useful resources
- 10 Lessons Everyone can Learn from Warren Buffett for Business Success - Lifehack