Warren Buffett is widely recognized as one of the best investors of all time. He didn’t get this position by accident. He has built a huge fortune over the past seven decades following a set of rules that he still applies today.
Any investor can follow these rules to improve their investment process. In fact, I follow some of Buffett’s practices to help me choose investments and reduce the risk of losing money from my decisions.
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As such, here are the rules I would use from the ‘Oracle of Omaha’ to invest a lump sum of £ 5,000 today.
Buffett’s rules of success
The billionaire’s first rule in investing is to avoid money. That’s easier said than done. Even Buffett bought investments that ended up costing him.
That advice doesn’t mean we should avoid selling stocks at a loss, however. Instead, Buffett tries to convey the importance of avoiding companies at risk of bankruptcy. This includes speculative investments such as early stage mining or oil exploration companies. Early-stage technology companies could also suffer losses for investors if they struggle to make a commercial product.
With that advice in mind, I would avoid investing my £ 5,000 lump sum in companies that may be out of money. These include small-cap miners, speculative penny stocks, and heavily indebted companies.
When looking for an investment, one of the first questions Buffett asks himself is whether or not he understands the company. I will follow that too. Some companies are difficult to understand. This includes how they make money and how they generate returns for investors.
While these companies are highly sought after, I will avoid them because there is no better way to lose money than to buy something I don’t understand. This approach has helped me avoid multiple disasters in the past. These companies were market favorites, but their complex business models were designed to cover up fraudulent activity.
Invest for the long term
The third and final Buffett Rule I would follow to invest a lump sum of £ 5,000 today is to focus on the long term. The Omaha Oracle says investors should only consider a stock if they plan to hold it for the next 10 years.
This mentality forces me to put in extra work to understand a company and keep it in my portfolio. When I know I won’t be able to sell in the next ten years, I want to be sure that I bought the right stocks.
When I’ve done enough research to understand the company inside out, it’s easier to keep the investment. Especially through the ups and downs of the market cycle.
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Rupert Hargreaves has no interest in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. Views on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our subscription services such as Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that taking a variety of insights into account makes us better investors.