Warren Buffett Investment Advice of Financial Derivatives
Filed by: wbsp, under Warren Buffett investment advice | Leave a Comment
As it was mentioned in a previous post, even Warren Buffett’s stock picks get criticized for losing value during the current U.S. recession. However, as we see investment banks and insurance companies fail left and right, we can also appreciate how well Buffett steer cleared of this disaster by following his keep it simple investment advice.
We have all heard of the investment advice of invest in what you know. It is surprising how few people actually follow this advice and this goes for financial wizards as well. A case in point at what is being blamed for the current collaspe of the mortgage industry and of the top American banks is the complicated investment vehicle of derivatives. Loans were packaged and repackaged to spread the risk amongst many players. However, this too came as a pitfall as the financial firms could not retrace what they actually owned. And with the risk being wide spread, everyone was affected by these “financial weapons of mass destruction” as coined by Buffett. If the investment firms had taken Buffett’s investment advice, then we would be in a better place financially than we are at now.
Now of course, you might be saying that you would never have invested in something as complicated as derivatives. Of course not, these investment vehicles are not available to the retail investor. However, the principle of common sense is still the same. Most of us do not do the due diligence required when investing. How many of us havellistened to a “hot investment tip” from a supposed insider and then bought shares in a company that you have no idea what it is they do? If you don’t know what they do or it can’t be explained easily, the chances are you didn’t go over the stock fundamentals as well. Warren Buffett might be a genius but there’s no secret in his investment advice. 1) Buy in companies you understand and 2) have the intention of keeping it longterm. 3) Buy in well established companies that has an advantage over it’s cometitors and 4) make sure you buy it at a good value. If you didn’t go through the stock analysis, then you wouldn’t know if what you bought was cheap or expensive.
If these investment advice seems simple to you, then congratulations, you should be on your way to investing like Warren Buffett and have his success in stock picks.
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