Stock market: Learning from Buffett

Abu Ahmed | Published: February 19, 2015 00:00:00 | Updated: November 30, 2026 06:01:00

Stock investment guru Warren Buffett is still alive. His thoughts and ideas still continue to influence everyone in stock market investment. The things he wrote about, the ideas he had given out and the lecture materials he distributed are all must-read subjects for stock investors throughout the world. His ideas, thoughts and lectures about stock investment will outlive time as those are the very basics of the subject.
No one should step into the world of stock investment without reading what Warren Buffett said or at least having a sense of those.
Buffett by now has become a teacher to all stock investors. Anyone who followed him in fame afterwards could only become so in this area by learning his way of investment.
It may be a little bit different way. One basic principle of Buffett's investment was that he never ran with the herd.
He kept away from it carefully and opted very often for the stocks nobody bothered about for long.
Buffett is afraid of quick buildup in stock prices and scorns the conditions that draw hundreds and thousands of investors, mostly new ones, to the market.
But he is courageous in depressed market when frustration and despair drive the investors away or keep them inactive. He always looks for bargain in stock market investment. He is certain that he would get it again and again.
Warren Buffett is a successful investor for others in the sense that his managed mutual funds offers on an average much more dividend than other mutual funds managed by asset management companies.
Today he is not only one of the richest persons in the world, but also a person highly appreciated and adored.
And he has turned out to be a teacher for everyone having interest in stock investment.
About diversification of or holding varied stocks in the portfolios, Buffett opines that it is not needed to be overly diversified. If investors have the confidence, they can go on with small number of stocks in investing in with their money.
Too much of diversification takes way the gains in some stocks by losses in other stocks. So, blind diversification does not help.
What helps is to remain engaged with a small number or a manageable number of stocks which the investors know very deeply.
Buffett advises, before picking up a stock for investment, one must know the corporation's business in depth. Opportunity may exist in unknown corporations' stocks or in the areas hitherto not thought of.
Buffett counsels for having patience in stock holding. Those who hurry in buying and also selling out do badly in stock investment.
Buffett says risk is not the same as volatility; risk comes from over-estimating or overvaluing a corporation's stock. But volatility comes from market imperfection and it gives opportunities.
Price varies more than value and the variation in prices can be used by prudent investors successfully in their favour. Buffett says, unprecedented events occur at regular intervals and investors should seize on those events. But holding cash in the absence of opportunity makes sense.
The same thing was also told in a much cogent manner by another great economist, John Mynard Keynes. Keynes said holding cash was also a form of investment if investors thought that investing at prevailing price would only bring capital loss.
Buffett opines that investors should draw lessons from mistakes and he advises them to be candid in admitting mistakes. Buffett's father was also a successful investor. Father taught his son the basic principles of stock market investment at a very early stage.
In later period, in his young age, Buffett became a student of some great teachers in stock investment. One of them is Benjamin Graham.
Buffett leads a very simple life. He does not own a jet liner; he travels by economy class. He thinks money he manages belongs to people.
Buffett does what he loves to do and says people should do what they love. Investing in stocks is also a matter of love; people who have fascination with stock investment and become addict to it shine.
Bangladesh's stock market investors perhaps did not study any of Buffett's principles. Here stocks are not determined in most cases by the corporations' fundamentals; it's an up-and-down market mostly determined by the 'herd effect'.
Rumour and gambling seem to have become essential ingredients behind the market drive. Bangladesh's stock market investors also want to become rich quickly and in that pursuit, they run after those stocks which are prone to gambling or which are favourable with the herd.
The writer is Professor of Economics, University of Dhaka.
abuahmedecon@yahoo.com