4) Only Investing in Solid Management and Clean Books
Buffett does not invest in risky turnaround situations or, in untested management. He sticks with proven winners. Even when he buys a company outright, he prefers to broker deals in which management stays in place. You can be sure that Buffett does not chase after companies with questionable accounting practices, even if they look cheap to other investors.
Buffett once said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” Doing things differently, for Buffett, means avoiding companies where management has poor ethics or skeletons in the closet.
5) Understanding Timing, Picking Extremes
Buffett generally takes the long-term approach but, during the Great Recession, he noted that it is important to “be fearful when others are greedy, and be greedy when others are fearful.” During financial meltdowns, this means investing heavily when the market has been crushed and when the media and public are at an inflection point. Buffett has a proven track record of intervening in companies hit by recession, including Bank of America, Goldman Sachs, General Electric, and Dow Chemical.
6) Knowing When and How to Keep Buying on the Cheap
The common investor does not get to bet on the markets through custom, multi-decade derivatives investments, but there are ways for mom-and-pop stock pickers to buy in on the cheap. In the past, Buffett has reportedly sold put options that are considered slightly out-of-the-money in stocks he wants to acquire. While this gives him the obligation to buy more shares if the price dips, he receives a premium from selling the put options to lower his cost basis. Another tip is to just keep slowly acquiring shares regularly over time. For example, Buffett has consistently bought shares of Wells Fargo since the recession, adding gradually to the position rather than piling in all at once.
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