We have all read his name in rare admiration, and equal awe. Warren Buffet, the third richest man in the world is something of a legend when it comes to investing. Now you must be wondering why am I talking about the richest man in the world (well almost) in a blog that mostly talks about investing and personal finance for young middle-class people like you and me. How Warren Buffet`s golden rules are related to investment tips for beginners in India?
The answer is – because Warren Buffet may be a top billionaire, but his investing tips are simple and apply to the common investor as well. Just like an upper middle-class guy, he drives an old car, lives in a modest house and goes by a simple lifestyle. His investing and holding habits apply to every investor, small or big.
If you can incorporate the discipline and some simple ground rules he follows, your investing portfolio will be yielding and fruitful as well. I like to call these the golden rules from the Warren Buffet School of Investment.
So what are the investment tips for beginners in India from the Warren Buffet School of investment?
Investment Tips for Beginners in India
First, Lets start with Warren Buffet`s golden rules of investment and these investment tips can help beginners in India.
Investing for Beginners with Little Money
It is always advice able for beginners to start investing with little money and to start early.
Form Healthy Saving Habits Early
Saving is a habit, and it is a habit you need to inculcate early on in life. Most often young professionals don’t realize how important saving is until sudden expenses like buying a home or having a baby spring up in front of them. Starting in the first year of your job, saving small portions of your income will become a cushion for big, unexpected expenses. Splurging on expenses like eating out or partying every week might seem like a good option now, but it will hurt you when you find yourself short of the down payment on your dream house. This is not a joke, if you go out often, just sit down once and total the amount you spend monthly on eating out. The numbers grow dramatically once you sit down and analyze it.
Avoid Credit Card Debt
Although credit cards are an amazing instrument of getting discounts and cash backs, they are also a dangerous way of building up debt you don’t even want to owe. Spending on unnecessary things like high end smart phones you can’t afford builds up your debt and before you know it, your income is mostly going to pay for things you can’t even remember. The biggest trap is the “minimum amount due” option that the card offers you. Although rest of the amount goes out in installments, it takes a chunk out of your income. And the interest rates are going to be the highest possible. This is a folly that you can avoid.
Keep Cash in Hand- Always
As a rule of thumb, you should always have a year of your salary in a fully liquid savings bank account of fixed deposit. And keep it strictly for an event of crisis- a rainy day as it is called. Don’t touch it for events like a birthday party or a wedding dress. It is meant for crisis, keep it that way. You might not appreciate it now, but god forbid a period of financial stress occurs, and you will be thankful you had a rainy day fund.
Smart Investments For Beginners
Invest in yourself
You are the biggest asset you will ever have in life. Invest in yourself. And investing in yourself doesn’t mean getting fancy haircuts or clothes, it means to enrich your intellect. Read more books, get in better shape- exercise and get healthy. After all how will all the returns on mutual funds matter if you are going to spend it on medical bills only. In the mad rush of making money, do not neglect your health and family time. Peace of mind and a fit body are the reasons you are working for. Never forget, the smart investment for beginners is investing in themselves.
Learn more about How Money Works
No matter what your profession is- start learning about money. Even if you’re an IT professional or a doctor or a teacher- learning how money works will always benefit you. Start with simple things like compound interest and the power of compounding. Move on to more concepts. Knowledge about money will always pay off. Learn to understand your own accounts and income tax returns. Do not depend blindly on an accountant. Also learn to read financial statements of companies. You might have a better idea where to invest your money and where not to. Start reading the business page of the newspaper every day, even just the headlines to begin with.
Small Investments Big Returns
If it looks too good to be true, avoid it
The world works on reasonable terms. If an investment scheme is promising you the moon, there have to be some caveats. Look for them; wear the devil’s hat in these cases. As far as possible, avoid them. Pyramid schemes are the most common example of this. When an old family member/friend approaches you out of the blue and tells you they have found an amazing way to have a lavish lifestyle beyond your dreams in less than a year, raise the red flags in your brain.
Investing in Stocks for Beginners
It is not easy to invest in stocks for beginners. So, its always better to learn the pro and cons of stock investing and then dive into it.
The key is –high returns with low risk
Duh, you might think. As if you didn’t know that. But when Warren Buffet talks about risk, he has a whole new meaning. Keep your stock/mutual funds portfolio around stuff you understand. Also,there is no point buying a chunk of environment companies’ stocks if you have no clue what they are about. Do research about where your money is going to go, and then take a call. A website will only tell you so much. Research not just about the stock, research the company. Find out who is running it. Find out what is has done in the past and what is it going to do in the near future. Get hold of its financial results. Try to understand the financial reports filed by it. Then take a call.
History doesn’t Dictate the Future
As every mutual fund advisory says, past returns aren’t an indicator of future performance. Not every boom and depression cycle repeat itself. For example, if fall in value of a company is due to a onetime event that has never happened before, chances are the price won’t bounce back the same way too. This is very important.
Stock market is full of examples where one-time instances made or ruined investors. When you see past returns of a particular portfolio, also see the timeline it all happened in. Oil stocks did very well when oil was over 100 $ per barrel, but the same performance cannot be expected when crude prices are low.
Never Invest in a Business You cannot Understand
Don’t invest in a mutual fund only because the advertisement says “mutual funds sahi hai.” Define your goals. Learn about mutual funds. Find out what they are about. Read how they operate. Then choose a fund, see who the fund manager is and how his record is. Take a look at their portfolio. Point being, you should know at least the basics about where you are putting in your hard-earned money.
So, keep in mind-Successful investing takes time, discipline and patience.
“You can’t produce a baby in one month by getting nine women pregnant.”
This one is by far my favourite. No matter how much you want it, some things will take time. And that is true for investment returns. Unless you are a day trader with a hell of a luck, your portfolio will give you returns in a slow and steady manner over the years. Building a good portfolio takes time, and patience. And most important of all, it takes discipline.
So, what is your view on “investment tips for beginners in India”?
Happy investing and happy holding. May the Warren Buffet be with you.
This article has been written by Rishabh Mehta. Rishabh Mehta is a banker by profession and a writer by hobby. He has done his Masters in business administration from IMI New Delhi. In the past, he has written freelance for The Times of India and his areas of interest are finance and polity.