Buffett’s Secret to Investing Success

When it comes to taking investment tips, you probably want tips from someone who has a long-standing, proven track record of success. You would have a hard time finding anyone who has a better track record than Warren Buffet. The good news is, Buffet is also not hesitant about sharing the many secrets to his success. Largely because they are not so much secrets, as they are disciplines. There is no reason not to share them because building wealth doesn’t require “insider knowledge” anywhere near as much as it requires discipline. Here are 3 of Warren Buffet’s biggest “secrets” to investing success.

1. Know the difference between investment and speculation

Investment is when you purchase something far below its proven actual value. Speculation is when you purchase something that currently has less value than what you are paying for it or only as much value as what you are paying for it. You are speculating that it will pay off in the long run. Another word for speculating is gambling because you are gambling on ever getting your money back. There are certainly large profits to be made from speculation but it is far riskier. There is a place for both investment and speculation in wealth building, but it is important, to be honest, and clear about which one you are engaging in.

2. Be in it for the long haul

One of the reasons that building wealth takes discipline is that it doesn’t happen overnight. Too often, people invest wanting immediate results. Long-term investments are always going to offer a better ROI than short-term investments, but that doesn’t mean they won’t go through fluctuations, thanks to short-term investors. Long-term investments have to be able to withstand the ebbs and flows created in the market by short-term investors and other factors that affect market conditions. To that end, investors can’t be alarmists, pulling their money out of an investment every time an investment seems to go into a free fall.

3. Have margins

Markets will rise and fall, so it is important to not place yourself in a precarious position. Not only do you need to have a cushion to fall back on if one of your investments goes south, but you also need to have safety margins to weather storms without losing money. One of the biggest mistakes most investors make is over-leveraging themselves. Once again, this is why it is so important to understand the difference between an investment and speculation. If you make an investment by buying for a price significantly lower than what the investment is worth, then there is room for the price to drop without you losing money. If you are in it for the long haul, this also gives you a cushion to wait for the price to climb again.

One of the biggest secrets to Buffet’s success is not a secret at all. It is simply to play it safe. There are always going to be plenty of hucksters promising low risk, high reward investments. The sharpest investors, like Buffet himself, simply know enough to walk away from a deal that seems too good to be true.