To succeed in any field, you must have a mentor, coach, or guru to guide you on the right path and provide you with the proper mix of knowledge, experience, and practice. Similarly, you need a financial advisor to guide you with your personal financial management and investing strategies. Some people have the facility of hiring a financial advisor or consultant; however, you also have the option of reading, understanding, and applying the strategies or lessons used by successful investing gurus who are legends and stalwarts in financial markets.

Let’s explore and learn what investing gurus have to say about the stock market and investment strategies.

Benjamin Graham, Author of “Intelligent Investor”
Ben Graham used to say, “In the short run, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.” This clearly tells equity investors not to pay too much attention to short-term movements; rather, they should try to understand the long-term benefits of investing in stocks.

Mr. Graham also advised investors to buy stocks that are undervalued or available at a discount to their intrinsic value. Further, he was a strong believer in choosing consistent dividend-paying companies, which can provide sufficient cushion even during bear markets.

Mr. Graham has seen several market cycles, notably the 1929 depression during which he lost most of his money and later wrote “Security Analysis” in 1934. Graham is also widely acknowledged as one of the early gurus to adopt a “value investing” philosophy and has been a mentor to Warren Buffet, the world’s most successful investor.

Warren Buffet
Warren Buffet is one of the most successful investors who championed the “value investing” strategy. Mr. Buffet has adopted various investing principles and methodologies that have found fan following across the world. One can draw hundreds of lessons from Mr. Buffet and his investing style, but let’s look at a few important principles.

  • Buffet used to say that an investor has to be greedy when the markets are in a fear (bearish) and fearful when the markets are greedy (bullish).
    • If we look at Indian markets, small investors tend to enter markets during the bull phase and invest at peaks, after which a crash or fall erodes profits and their capital.
  • He also advocates buying stocks at a price below their intrinsic value, which Graham also championed.
  • Warren Buffet invests in businesses that he can understand, and those that provide steady earnings. If he is able to identify companies with strong business models, he invests in these companies for the long term. Buffet also used to say that his holding period is forever.
    • Buffet stressed that investors must choose stocks/companies whose business they understand. For example, most people understand the fast-moving consumer goods, personal care, and auto industries. However, a small investor may have difficulty comprehending the business model of certain industries such as information technology, biotech, and infrastructure, and how it affects their investments.

Buffet uses numerous principles and methodologies, which we also discuss in Lesson 10: Key Investment Metrics. However, the biggest lesson that we can learn from the legendary investing guru is his simplistic lifestyle and his ability to hunt for bargains.

Warren Buffet’s Lifestyle
Warren Buffet, one of the world’s richest investor, surprisingly leads a modest life. He lives in the same house in Omaha that he bought 50 years ago. Despite being a billionaire who can afford several private jets, he drives his own car.

This lifestyle is in stark contrast to billionaires such as Donald Trump, Richard Branson, or Bill Gates. Unlike other rich and famous people, you will not hear any news about Buffet’s fancy real estate properties, hi-tech gadgets, or parties, which most people aspire for. Buffet uses the simple principle of buying stocks at a discount or for a bargain, just like people make use of seasonal discounts or special offers.

Converting Crisis/Downtrend into Opportunity
Most people may have the impression that a market crash represents a bad time; however, investors like Warren Buffet have found these times to be the best to buy good stocks at cheaper prices. You don’t need to wait for another Great Depression to have a systematic plan to invest on a regular basis.

When stock prices decline during a bear market, as in late 2008, use the opportunity to buy blue chips and strong companies at attractive valuations. Similarly, short bear phases provide good entry points for investors; for instance, late 2011 and early 2012 were periods when the Nifty was below the 5,000 level and several blue chips stocks could have been purchased at this stage.

The Next Step
To take advantage of opportunities, investors have to first have a stable financial position, which requires that a person have a stable source of income, adequate savings, and investments. Therefore, one must have a personal financial plan or model in place to ensure a positive cash flow every month. This positive cash flow will help you build your savings (for the short term) and investments (for long-term wealth).

We will discuss personal financial planning in greater detail in the next step, which will provide a strong foundation for you to create wealth for the next few decades.