Warren Buffet: Write Down Your Why

There are several reasons you might decide to invest in a certain company. But Berkshire Hathaway CEO Warren Buffett says there's one you should always avoid: Buying a stock merely because you think it's going to increase in price. That's because even the best investors aren't able to predict how the market will perform. Instead, you should invest in companies that you both understand and believe will offer long-term value, according to Buffett. No matter how much or how little you're buying, you should be able to get your reasoning down on paper without relying on outside resources.

Source: https://www.moneycrashers.com

"Everybody when they buy a stock should be able to take a yellow pad" and write down exactly why they plan to invest in that company, Buffett said in a CNBC interview. Investors should not worry about how the stock will perform in the near term. Buffett recommends focusing on businesses that will hold their value over time.

Buffett follows three general rules when deciding which companies to invest in: "First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price," he wrote in his 2019 annual letter to Berkshire shareholders. That said, any individual stock can over- or under-perform, and past returns do not predict future results. Beginner investors are encouraged to look into low-cost index funds instead, which are less risky.

Having said all that, Covid-19 has punished Warren Buffet’s Berkshire Hathaway with USD9.8 billion write-down due to Precision Castparts. Berkshire still has cash of USD146.6 billion and had just USD797 million in equities in second quarter (this is excluding purchase of Dominion Energy for USD4 billion).

References:

1. Warren Buffet Recommends a Simple Exercise Before You Buy Any Stock: Write Down Your Why, Emmie Martin, Feb 24, 2020 (www.cnbc.com)

2. Pandemic Punishes Warren Buffet as Berkshire Hathaway Takes Bid Writedown, Reuters, August 9, 2020