7 Principles of Investment that all should follow

Financial advice differs from individual to individual. However, there are 7 principles of investments given by the most successful investor of the 20th century, Warren Buffett, which should be followed by all.

You can ask any financial planner about your investment and financial needs and how to manage your investments and money. They will often tell you that, after they have done a thorough analysis of your income and expenditure and other liabilities; only then can they arrive at some sort of financial strategy. However, almost all of them will agree with these 7 principles of investing from Mr. Warren Buffett-considered the most successful investor of the 20th Century, which apply to all and will be widely beneficial if applied to each and every investment scenario. What are these 7 Gems from Warren Buffett? Let’s have look:

1. Save first, save next and spend thereafter:

This is perhaps an overused and over-heard statement by now, but can’t help it. It is the basis of your financial life and only if this is followed correctly will you be able to build a decent financial fortress for you and for your generation to come. We tend to spend first and whatever is left we try to save and often end up saying ‘oh no! At the end of the month it is so difficult to save…I hardly save anything’. But really come on, save first, save more and whatever is left, spend from that. Ignore this principle of investing at your own risk.

2. Spend wisely and don’t fall into the habit of spending:

Once you save FIRST and then decide to spend, spend only on your NEEDS and NOT on your WANTS. Warren Buffett coined a great quote which goes “If you buy things you do not need, you will soon be selling things you really need”. And it is indeed true. He even points out that prices aren’t purely rising because of inflation. But there is a global rise in consumer demand for things that never existed. He is right. Just come to think of it; do you really need a 45,000 smartphone? Do you even use all the features? Forget using, Do you even know all the features? NO, but still people buy and those are hot selling and eventually you are so used to these type of things that your every next purchase is viewed in relation to that and  you tend to spend more and more. Same applies to a lot of other things we buy.

3. Invest wisely and invest for long term:

Investments should not be speculations; they should be sound decisions and not entered into impatiently. Among his 7 principles of investing, Warren Buffett claims investments to be marathons and not 100 meter sprint races. Whatever decision you make today will better your life when you may not be as agile and work-centric and will be of greater advantage to your kids and family you leave behind. Be patient; always invest with a horizon of at least 3-5 years and at times even 7-10 years. Do not fall for tips and speculate for the short-term.

4. Liquidate Dud investments:

If you have been investing for some time you may be aware that some investments just won’t grow. Reasons could be plenty but they just don’t seem to give you any substantial returns and even if they do they quickly go back to being what they were. This happens with some shares, certain mutual funds, ULIPS etc. If there is a generic down fall in the markets, then it is fine, but some won’t grow or show signs of improving even when things stabilize. These you should just liquidate and invest whatever money you receive into something more meaningful that gives better returns. At times even an FD will give you better returns than what such duds have given. Don’t stick far too long and hope that they will improve. Certain amount of time is understandable for your money to grow, however if you have invested in a mutual fund for instance and even after 3 years it shows negative or the same NAV or just marginal improvement, it’s time to change.

5. Understand first and then invest and not the other way round:

If you don’t know what you are investing in, then DON’T invest at all. Even if someone you know very well tells you to invest in X, Y or Z, ask them what it exactly is and how it works. Don’t blindly follow tips or advice and just park your funds there. Chances are the one advising you to invest may know what it is and it suits their needs, but that same may not apply to you. For example if there is an investment that doubles your money over the next 7-8 years, the other person may be able to block money for that long, however you may not be willing to do so. There are also lot of other factors and some of them can even be fakes or scam investments. So really ask questions, do research, and then invest.

6. Keep Things simple:

Some of the best things in life are great because they are simple; you can get what they mean and what they are. Similarly for investments too, keep things simple. There is an entire post dedicated to this principle of investing that you can find here. The best way to be aware and be able to manage your investments is if they are simple and uncomplicated, like insurance should cover you for losses and investment should grow your money, but problem arises when these are combined and you get a product like ULIP and then you don’t know what charges are deducted for what and how much of your premium is investment, how much is expense and admin charges.

7. Diversify your portfolio:

“Never put all your eggs in one basket”, if the basket falls, you have no eggs left for breakfast. Same applies to investments. Diversify between debt and equity and even further within those. Invest in Mutual Funds and some direct equity if you are inclined towards equity. For debt too, choose bank FDs, Debt Mutual Funds, balanced funds, FMPs etc. Diversify. Also you can look at Gold, Silver, Real Estate, if you have the funds. If one investment class doesn’t work, the other will support it.

Warren Buffett is often called the ‘Oracle of Omaha’ (Omaha being the place he comes from), and there is good reason. He is the most successful investor of our times. The above 7 principles of Investment are something that goes well with any form of investment and should be followed and practised by one and all. It can truly make a difference to your financial life.

Do you have any specific principle of investment that your follow? It will be interesting to share your views, leave your thoughts in the comments below.

Aniket Vaishnav