4 Be fearful when others are greedy and greedy only when others are fearful
This is the most famous Buffett quote of all and with good reason, says Tuan Phan, a board member of Common Sense Personal Finance and Investing, a non-profit community of UAE investment enthusiasts. “Greed and fear are the two dominant investor emotions. If left unchecked, they tempt us to do things that may damage our long-term wealth.”
Too many investors follow the herd, buying stocks when everybody else is buying, selling when everybody sells.
Mr Phan says a good example is the market crash during the financial crisis. “Those who panicked and sold banked massive losses while those greedily buying stocks at depressed prices can now look forward to an early retirement.”
Keep your emotions in check. Avoid getting over excited on the way up, or too panic-stricken on the way down.
5 Our favourite holding period is forever
There is a big difference between speculation and investing, Mr Phan says. “Investing involves buying an asset for a share of future profits, speculating involves buying an asset in hope of selling it for a higher price to someone else.”
Wealth is generated from compound growth and interest over time, rather than trying to time the market, he adds. “You want to be holding a productive asset such as a dividend stock for as long as you possibly can.”
Mr Phan says most ordinary investors lack the time, knowledge or skill to successfully pick individual stocks and shares as Mr Buffett does. “For them a globally diversified ETF is the best option. Buy and hold for years, preferably decades, reinvest your dividends, avoid panic selling if markets crash and finally, retire early.”