DotBig review: 3 investment rules of Warren Buffett
We all know Warren Buffett as the most successful investor in history. He made his first investment when he was just 10 years old. By his 30s, Buffett had managed to become a successful millionaire thanks to his wise decision to invest money in Berkshire Hathaway stock. At that time, a share was valued at $7.60, and today it trades at more than $400,000. Buffet owns a net valued at around $97 billion.
Buffet managed to achieve such success because of his patience and long-term strategies. He invests in companies that aren’t supposed to reach significant heights but have strong management. Buffer can hold undervalued stocks for decades until it happens that his decision to rely on strong management was absolutely right.
If you want to become more successful in investing than today, consider following the 3 main rules of Warren Buffett. DotBig analysts will introduce them to you. We hope, this will help you to make the best decisions!
1. Selling put options
Buffett put the biggest emphasis on blue-chip stocks. Some investors might think that because of this they should avoid complex derivatives. However, this is a big mistake. To achieve such success in investing, Warren Buffett also used an innovative technique of options trading, which is focused on selling naked put options. According to the annual report of Berkshire Hathaway published in 2007, the company had 94 derivative contracts, which generated $7.7 billion in premiums.
This is a hedging strategy that requires an investor to sell an option where he promises to invest in a stock. It’s important that this stock is undervalued at the moment of buying. As a result, you receive money after selling an option and can hold this money because the stock price doesn’t go down.
Buffett applied this strategy for the stock he would like to own in the first place. This is exactly what he did in 1993 when putting options to pocket nearly $7.5 million in income while waiting until the Coca-Cola stock prices fall down to the strike price.
Keep in mind that this hedging strategy might be too complicated for beginning investors, so don’t take huge risks until you understand how it works for sure.
2. Investing in small-cap stocks
When we talk about companies with small market capitalization we have to specify that these are the ones worth from $300 million to $2 billion. Today, Buffett says that he has to look for “elephants, not for “mosquitoes”, even though that might seem more attractive in the early days of a company’s operation. However, in the beginning, this was quite different than today.
Warren Buffett started his career as an investor by putting his money into such companies. For example, when Warren was 20, we bought stocks of GEICO when the company was small. Today, when it’s privately owned by Berkshire Hathaway, it’s estimated that the assets of GEICO are worth $32 billion.
3. Cutting losses when necessary
No one is perfect, and even such a big name as Warren Buffett can sometimes make mistakes. The reason he became such a successful investor is that he can admit when he is wrong. He realized that the performance of the company might change due to the management of the company choosing another strategy of development. When he realizes that this new strategy might bring losses, he tries to cut these losses.
For example, recently, Buffett invested in airline companies. It took only four years (from 2016 to 2022) to realize that this was a misstep, so he dropped them all, which was quite a significant loss. Even though Buffett lost quite a big amount, the losses could be bigger if he wouldn’t drop all of those stocks in 2020. He managed to cut losses when it was necessary.
Conclusion
DotBig specialists would like to conclude that you cannot become rich overnight — investing is serious work that requires patience and commitment. We hope that these 3 rules of the world’s most successful investor will help you to make wiser decisions.
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