If you're trying to build up a portfolio of ASX shares from scratch, congratulations. Investing in shares is a big step to take, but one that can help set you up for life. I think the best source of advice for a new investor is the legendary Warren Buffett.
Warren Buffett is almost universally regarded as one of the best investors of all time. He has single-handedly built his US$120 billion fortune by consistently investing in top stocks through his company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B)
Unlike many billionaires, Buffett is liberal with giving out valuable advice to investors of all stripes. So today, let's talk about three Buffett tips that I think every investor starting out from scratch should keep in mind.
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3 Warren Buffett tips for a new investor
Invest in a quality company, not a ticker code
Buy a stock the way you would buy a house. Understand and like it such that you'd be content to own it in the absence of any market.
Too many investors think they need to constantly trade shares to be an investor. In reality, this approach will probably bankrupt you. A far better way forward is to think of buying a company like buying a house.
You need to do your research, and understand how a company makes money and will continue to do so completely. Buffett thinks of buying shares in, say, Coca-Cola Co (NYSE: KO), as buying a stake in a quality business, not picking up KO stock to flip for a profit.
Leave your emotions at the door
The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.
One of the most common mistakes I see new investors make is letting their emotions dictate their investing decisions. It can be a horrible feeling when you buy a share and its value immediately goes down. Likewise, it can be exhilarating to see the value of a company you have just bought spike in value. But acting on these feelings will almost certainly result in you losing money.
These are feelings you have to learn to put aside if you're going to become a successful investor. Too many people look to the markets for affirmation of what they've just bought. If you buy a share that subsequently loses value, many investors are tempted to sell and 'cut their losses'. Especially if everyone else is bailing out.
But Buffett tends to buy when others are selling, and sell when others are buying. Ignoring the crowd and making decisions that make sense to only yourself is what we should all be striving for.
Buffett: Consider an index fund
By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.
Most people think investing in shares means choosing individual companies for your portfolio. But that isn't the case entirely. You can also choose to invest your money in a broad index fund.
This typically invests in all of the major companies on a stock exchange. For example, in Australia, you can buy index funds that track the largest 200 or 300 shares on the market. In America, index funds that track the largest 500 US shares are common.
Buffett tells us that if we aren't professional investors who love studying stocks every day of the week, then we should consider an index fund instead. Indeed, he once also said, "A low-cost index fund is the most sensible equity investment for the great majority of investors".
