How do you become a successful investor? There is no single answer to this question, unfortunately.
Becoming a successful investor is a long and time-consuming process. There are also plenty of painful lessons along the way that you have to take on the chin and keep moving forward.
How to become a better investor
No one knows the risks, rewards and effort required to become a successful investor better than the Oracle of Omaha, Warren Buffett (Trades, Portfolio).
It's no surprise then that he has been asked for his advice on this subject several times in the past. In 2007, for example, one audience member at the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting wanted you to know how they could improve their investment skill. Buffett had a definitive response for them.
He said that the best way to improve as an investor is to read everything you can. Buffett went on to add that as a young man, by the age of 10, he had read every book in the Omaha public library about investing, and some of them he had even read twice. This voyage of discovery has continued ever since.
At age 19, he read Benjamin Graham's now-famous book, "The Intelligent Investor," and he has said this instantly transformed his investing outlook. "What I'm doing today at age 76," he said, "is running through the same process I learned from the book I read it 19."
"Jump in the water"
The Oracle went on to say that as well as reading, an investor should be trying to seek out conflicting thoughts and decide which make sense.
Then, "You have to jump in the water." The best way to learn, he said, is by doing. "You'll soon find out whether you like it," said Buffett. "The earlier you start, the better."
Another key is to keep an open mind. As Buffett went on to explain, throughout his career he has made money from hundreds of different trades and investments, none of which followed a predefined pattern:
"Charlie and I have made money in a lot of different ways, some of which we didn't anticipate 30 to 40 years ago. You can't have a defined roadmap, but you can have a reservoir of thinking, looking at markets in different places, different securities, etc. The key is that we knew what we didn't know. We just kept looking. We knew during the Long Term Capital Management crisis that there would be a lot of opportunities, so we just had to read and think eight to 10 hours a day. We needed a reservoir of experience. We won't spot every one, though – we've missed all kinds of things."
To this point, Charlie Munger (Trades, Portfolio) added that the best place to look for bargains was inefficient markets, areas of the market where other investors weren't looking. "You shouldn't be trying to guess if one drug company is going to have a better pipeline than another," he summarized.
Always be on the lookout for opportunities and be ready to pounce when they present themselves. Sometimes it might seem as if there are no opportunities in the market, but this drought won't last long. As Buffett said in 2007, "There won't be any scarcity of opportunity in your life, although there will be times when you feel that way."
The bottom line
These are Buffett's tips for becoming more skilled. He has stated that continually reading and updating your knowledge of the world is critical if you want to become a better investor.
Unfortunately, there is no shortcut here. You have to put in the work. But if investing is something you love and enjoy, that shouldn't be too hard. If you don't have the time, an index fund might be a better option.
Disclosure: The author owns shares in Berkshire Hathaway.
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