Warren Buffett Rules of Investing | 3 Golden Rules for Investing by Warren Buffett

Let us start today's article, and in the start of the article itself, I want to ask you a question What kind of investor do you want to be? And maybe out of 100, 90 people would say they want to be an investor like Warren Buffett. 

But for that it is very important for us to know What are Warren Buffett's three golden rules of investing? And using that how can we choose a good stock And we can make a lot of money because of it in the coming time? 

Let us start today's article, In which we are going to talk about Warren Buffett's three golden rules Which tells us that if you incorporate them as an investor then you can become a very good investor. And by becoming a good investor, you can pick a good stock and earn a lot of money. 

Let us talk about the first rule What is Warren Buffett's first rule of investment And what can you learn from it as an investor. So if I talk about the first rule then that is time related Now what is this time for and what is the rule related to it. 

Warren Buffett Rules of Investing

1. Do not see time to invest in a good company

So friends, whenever time comes to your mind when it is investment related Two questions must come to your mind First, what is the right time to invest What is the right time when I should invest in any stock? And the second and most important question For how long should I invest? 

So we will relate these two questions to Warren Buffett's rule and answer these two questions. First, what is the right time to invest, So here Warren Buffett says that there is no right time to invest and the right time is today. If you want to invest in any particular stock The best day to invest in that is today. 

Which means that if you feel that a particular stock is very good And you want to think about investing in that You have convinced yourself that its business model is very good And it can give you very good returns in the coming days In that case, you should not wait for the right time But when you feel that that stock is good, that is the day you should invest in that stock. 

But here you might want to ask a lot more questions Why should go and buy any stock on any day, instead the day the market goes down I will buy that stock on that day so that I can get that stock at a lower price and I can make more returns on it. But speculating that one day the market will go down And you will get that stock at a lower price It can be very risky. 

Here I remember a very nice quote by Warren Buffett, which relates to this question a lot So Warren Buffett says, It's far better to buy a company at a fair price, Rather than buying a fair company at a wonderful price. So if the company is very good, you can buy it at a fair price But what would be worse than this is to buy a normal company at a high price Now. 

I will talk about the second question under time Which impacts retail investors like us a lot. We always ask the question that if I am investing in any company, how long should i invest for? So here Warren Buffett says that The best time horizon for which you should invest in any company It should be your lifetime. Which means you should choose such a business Which you would never think about selling in your lifetime. 

Because, what does buying a share mean? That you are buying the business of that particular company You are buying your share in that company. And whenever think of investing in any business Can you only judge that on the basis of its price? No, for that it is very important for you to understand its business And after understanding you should convince yourself That this company is very good and in the coming time it can perform really well And after that you should invest in that company. 

Without thinking that if the market goes down, you will get it at a lower price If you find a good company, invest in that on that day itself When you convinced yourself and your investment period It should be long enough for you to never feel the need to sell that company. 

Now I will come to the second important rule But for that I would like to ask you a question How do you think you should choose your stock? A retail investor first asks this question To every investment advisor about how they should choose a good stock Should I, before choosing a good stock, have finance or accounting knowledge. And if I don't have finance or accounting knowledge, can I start investing?

2. Not necessary to have knowledge of finance or accounting to invest

So here I will talk about Warren Buffett So Warren Buffett says that To invest, it is not necessary that you have a lot of knowledge about finance or accounting. But what's most important is if you understand the business or not So if you understand a business really well You can come and invest in the share market. 

But another question that people do not understand here is How do I understand the business? I have 8 or 10 kinds of businesses in front of me Which business do I have to understand first So for that as well, Warren Buffett gives a very good concept which we call Circle of competence. 

By talk about Circle of competence Warren Buffett says that If you have to choose your first stock ever and you don't understand other businesses So first, whatever your competence is Consider that if you work in the agriculture sector And you understand agriculture very well. About how agriculture works And if any company performs well in the coming time, in the agriculture sector So how can it do that, because you know the ins and outs of the agriculture sector So in that case if I have to choose my first stock The first stock I choose should be from the agriculture sector. 

And I should see how its business performs And after understanding its business, if I like that company, I should invest in it. Regarding this Warren Buffett has two very nice rules Which he says, the first rule is, Never lose money And after this the second rule is Never forget the first rule. That you should never lose money and you should remember the first rule. 

For this, it is very important for you to choose a very god company in which you have to invest And if you want to invest in a very good company It is not necessary for you to have finance or accounting knowledge. But it is very important for you to have a business sense You should understand how the company's business is. 

How does the company run its operations And how can it perform in the coming days. If all these questions are clear in your mind Then you can choose a good stock. And without thinking much, you can invest in it for a long time And the chances can increase for you to get good returns. 

Here I remember another quote of Warren Buffett And he says that, you should never see the return on your investment. But now you must be thinking that everyone tells you that when you pick a good stock You should see how the return on investment is, Which tells you that if you invested Rs 100 What is the return you get on that. 

But Warren Buffett says that Along with return on investment, you should see return of investment. Now what is the difference? between the two Return of investment tells you how safe it is For you, that the business that you have invested in For how long can I hold it and keep. Consider that I chose a company that doesn't have a lot of stability And maybe in the coming days, it can perform well Looking at that, that the return on investment can be good in one year And I invested in that. 

But after one year, the company doesn't perform well So here you neglected the return of investment. So it is very important that along with return on investment You should see the company's stability And see that if you want to keep the money invested for the next 10-15 years How stable will that be. What is the risk of investing in that When all these concepts are clear about a particular investment At that time, without thinking too much you can invest in that business. 

3. Always choose companies with good competitive advantage

Let us talk about the third principle In the third rule Warren Buffett says that, always choose companies with a good competitive advantage. Now you might get this question in mind How can I decide which company has a competitive advantage Which can help me choose a good stock. 

So I will tell you two ways, using which you can get a small idea Whether that company has a competitive advantage or not. If I talk about those two ways then the first one is slightly theoretical In which I will tell you about Porter five forces Which is a model that can help a lot for you to decide Which company has a competitive advantage. 

The second one is about awareness and practical advantage. In which you can be a little extra aware And then decide which company has a competitive advantage Without going into any model. So here Warren Buffett says that a business which is very big and very good Their brand recognition is very good. 

Like if I ask two simple questions First, if I talk about running shoes What is the first brand that comes to your mind? It is possible that a lot of us, think of Nike as the first name. There, if I talk about any fast food chain where you probably like to eat If I talk about the name of that then maybe in your mind you must be thinking of Mcdonald's or KFC. 

So for this Warren Buffett says that he likes to invest in those businesses Whose brand recognition is very good. And where the customer starts recognising the brand with the product itself, that company's competitive advantage becomes very good. Like if I talk about cold drink Then coca cola's name might come to your mind In which Warren Buffett has a very big stake as well. 

But now you must be thinking that this way through which you can guess with which brand do people associate more with That can be very case to case and subjective. It can be possible that Adidas comes to mind Someone else thinks of Nike Because of which I cannot get a clear idea about which brand has more recognition. So here there is a theoretical model which is called Porter five forces model Using which you can see how good the competitive advantage of every business and every industry. 

If I talk about Porter five forces then you should mainly look at 5 things Using which you can get an idea that that company's or that industry's How the competitive advantage. 

  • Threat of new entrants

If I talk about the first thing, then that is Threat of new entrants Which tells you in any industry If a new player wants to come, what are the restriction on them Or how difficult it will be for them. Like if I talk about a sector in India, Oil marketing sector Where there are mainly only two or three companies There the threat of new entrants is very less. 

Because there for a new entrant to come is very difficult So what are those factors that reduce the threat of new entrants So those factors are fixed cost In any industry where the fixed cost is very high There, the chances for a new entrant becomes very low. Like when I was talking about the oil marketing sector That sector is quite a regulated sector That's why the chance of a new entrant there becomes very less. 

So if you think of investing in any company You should go there and see the industry that it operates in How the threat of new entrants is, in that industry. If it is very high Which means that any entrant can enter there at anytime And they can take the market share of the company that you're thinking of investing in So you should think twice before investing in that company. 

  • Bargaining power of suppliers

Let us talk about the second force And the second force becomes very important in that industry The industry which depends on suppliers a lot The second force is bargaining power of suppliers. If I talk about an industry in India where the bargaining power of suppliers is a lot The name of that industry is Auto sector. 

So before you invest in any company or any industry The industry that you are investing in There, the bargaining power of suppliers shouldn't be that much. Because when the bargaining power of suppliers becomes too much They can start charging more money from companies. 

And when suppliers start charging more money Then that company's production cost increases And when that company's cost increases Then the company will have to increase the price, but in the case that the company cannot increase the price In that case the company's operating profit margin will start to go down. 

  • Threat of substitute products

If I talk about the third force, then the third force is Threat of substitute products. Like if you chose a company where you felt that the company's business model is very good And it can perform very well in the coming time. Because that company's product sells very well in the market, But now you should see that whether in the coming time That product or service can be replaced by another product or service If that product or service cannot be replaced by others in the coming time Then it is possible that choice of investing in that company is very good. 

But if you feel that there is a risk That that company's product can be replaced in the coming time. Then you should stay away from that company. Because in that case the risk can be very high If that product is replaced by another The company won't be able to expand itself The company's sales won't be able to increase that much And the company's share won't go up that much. 

Like I want you give you a very small example You should not take this in investment terms, I am giving a layman example, Consider that until recently you used plastic spoons Then one company that used to make plastic spoons You thought of investing in that company, Because nowadays, the plastic spoons have been replaced by wood spoons. Because people don't think its good to use plastic nowadays. 

Apart from that, we used to use fossil fuels a lot recently But now people are getting out of that now and going into green energy. So you can get an idea from this that when you invest in any company So you should see whether that company's product can't get replaced by another in the coming time. 

  • bargaining power of buyers

Now I will talk about the fourth force And the fourth force says that That if you invest in any company In that case you should how the bargaining power of buyers. Which means that if you're thinking of investing in Company, A And the product that the company makes If the buyer has very less bargaining power at the time of buying There can be good control in the pricing of that company. Which can help a lot in improving the margins of that company. 

But if I talk about another case, consider Company B When it sells its products There the buyer comes and bargains a lot when it comes to price. And when the buyer has a lot of bargaining power it tries to buy the product at a lower price. And when he buys it at a lower price The company's sales value will go down. Because of which the company's operating profit margin will go down And as a shareholder your chances of getting losses will increase.

  • Rivalry among competitors

If I talk about the fifth and last force That tells us rivalry among competitors. Consider that there is a company in which you are thinking of investing, And there are only three companies in that industry. And there is a lot of rivalry between those three companies They get into a lot of competition among themselves Because of which they reduce the price of their product a lot. 

So consider that if one industry only has two or three companies and one company reduced the price of its product Then even the other company has to reduce the price. And when the rivalry is a lot Every company starts cutting its price. And if you invest in any company of a industry where there is a lot of rivalry Then it is possible for that company to have to compromise with prices in the coming time. 

And in the case where a company has to compromise with its price, the company does not have a lot of control over it PnL Which doesn't impact you well as a shareholder. So Porter five forces tell you that if you pay attention to these five things While selecting a good company and a good industry Then the chances increase That what Warren Buffett said that you should choose a company which has a good competitive advantage Then using Porter five forces you can achieve that golden rule. You can choose a company which has a high competitive advantage. 

So this article we made, was purely for educational purposes. Every example we used of any company Was only for educational purpose. We absolutely do not recommend the buying or selling of any stock. So I will end this article, with a question for you Which golden rule out of these three is your favourite?And which rule do you think will help you make a lot of money as a retail investor.

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