Learning how to invest in the stock market can be daunting. Do you ever feel overwhelmed because there are so many investing choices and you lack the knowledge to choose the best ones?
Having a mentor can help put you on the right track -- and there's no better guide out there than billionaire investor Warren Buffett, founder of Berkshire Hathaway. Although he can't coach you personally, he can guide you by offering advice that he's culled from his lifetime of investing.
Here are four tips from Buffett to get you started on your investing journey.
Warren Buffett. Image source: The Motley Fool.
1. Buy strong businesses with competitive advantages
One of the key components of Buffett's investing strategy is to buy hardy businesses that are protected by a strong moat -- which means they have advantages to keep them ahead of their competition. He also loves quality businesses with strong management teams.
Although he looks for a good value in price when he buys, it's not the most important thing. As he wrote in his 1989 annual shareholder letter: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
2. Wait for opportunities to purchase good companies -- then pounce
According to Buffett, once you find a company worthy of your investment dollars, you should wait to buy until opportunity strikes and the stock is selling at a reasonable valuation. One of his most well-known quotes is, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
When others are scared to buy because of market turbulence, you may find yourself fearful as well -- especially if your desired stock is slumping. But if you've chosen a company and know it's a good fit for your portfolio, be ready to pounce on it when the market corrects. There may not be a better opportunity to pick it up at a reasonable price.
3. "Never invest in a business you cannot understand."
There are thousands of companies you can invest in, but the above Buffett quote stresses his strong belief that it's important to understand a company's business model. As he once stated, "Risk comes from not knowing what you are doing." And the only way to know what you're doing is to comprehend how a company makes money.
One long-term Buffett stock you probably understand is Coca-Cola (KO). It the leading soft drink company in the world, and you've probably guzzled more than a few in your life. (Buffett himself is known to drink it daily.) Buffett started purchasing stock in the company in 1988 and hasn't looked back. He's held Coke in his portfolio longer than any other investment. His initial investment of approximately $1.8 billion is now worth over $23 billion.
As a beginning investor researching this stock, you'll discover that the Coca-Cola Company is decently diversified, with 26 brands -- each of which brings in more than $1 billion in annual revenue. Would it be a good investment for you? You can begin your own research. But with its depressed stock price, a current dividend yield of 3%, and no sign that it's going out of business, Coca-Cola may be a good stock to start with in your portfolio.
4. Buy them all with index funds
The most basic -- and perhaps most valuable -- piece of Buffett investing advice for beginners is that it's not necessary to choose individual stocks to be a successful investor. If you're just starting out, it may be better to focus on index funds.
These investments track the performance of an individual index. Take, for example, the S&P 500, which is an index of 500 of the largest and strongest companies in the U.S. Through an index fund, you can buy into all of them at once, without needing to select which stocks you think will be winners.
Buffett has said that buying an index fund "makes the most sense practically all of the time," and has instructed the trustee of his wife's inheritance to put 90% of her money into a low-fee fund after he passes. That's definitely walking the talk.
There's no better mentor than Buffett to lead you on the path to investing success. By following these four tips, you'll be ready to start buying stocks. And when anyone asks you how you know what to buy, just say, "Warren Buffett told me."
