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Warren Buffett is considered the greatest investor of all time with an estimated Net Worth around $90 billion.
Surprisingly, though, he built his fortune by consistently applying three simple Minimalist Rules and without ever breaking them.
For most traders and investors it is not but in this article, you will learn how you can apply the same three rules to your daily analysis and trading activity in order to be profitable over the long term.
1. Recognize Greed
Buffett never based his investing decisions on the extraordinary short-term performance of an asset. This approach allowed him to always stay away from speculative assets which most of the times turned out to be bubbles or, at their best, underperforming less exotic assets.
For instance, he repeatedly criticized Bitcoin because “it’s an asset that creates nothing“.
He went even further.
[…] buying Bitcoin is buying something because you expect the pool of people who want to buy it, because they want to sell it to somebody else, will grow and it’s wonderful because it does create a rising price, it does create more buyers and people think “I’ve got to get in on this” […] They did it with tulips in the 17th century.
If it is true that investors can largely agree with him, Day Traders and Swing Traders will probably see opportunities in similar situations.
Regardless of your personal opinion, there is one rule that you should understand which is to recognize greed and treat it according to your strategy.
If you are a long-term investor you will probably want to stay away from greed. On the other hand, if you’re a speculative trader, then be very mindful of the asset you’re putting your money in.
2. Be Patient
As a beginner trader, you have thought at least once that you could turn $1,000 into $1,000,000 within a short period of time and consistently continue on that growth trajectory for decades.
During your learning curve, you then realised that your expectations were just too high.
The good news?
It’s not the Return-On-Investment that was exaggerated but rather the Return-On-Time!
In essence, you should not consider the Markets as a way to get rich quick because that is gambling, not investing nor trading.
And Warren Buffett can prove you that consistent-moderate-profits are always better than quick-big-profits.
Yes, because if you exclusively concentrate on the short-term profits, you are not exploiting a few essential features of the Markets:
- many assets appreciate with time due to the economic dynamics (e.g. see the S&P 500 performance over the decades);
- many assets pay dividends which represent passive income regardless of the asset’s performance;
- the leverage effect of compound interest;
3. Never Panic
Many traders lose money not because they’re wrong but because they panic when things don’t go as expected.
Do you know the reason?
It’s a natural mental behaviour which is called instant gratification. Basically, you end up taking big losses and, fearing further losses, you take small profits as soon as things are in your favour.
A similar mental approach will burn your account even before you realise you’re acting like that.
Buffett stated that if you cannot handle a negative performance you should not risk your money at all. So how does he manage Markets moving against him or even collapsing?
He uses one simple rule: don’t panic when things go wrong.
During his public talks, he made several examples recalling what happened in the recent past.
During the 2008 financial crisis billions of dollars were burned, the unemployment rate skyrocketed and headlines were tragic.
Over those dramatic months the world seemed to be collapsing.
The AAPL stock dropped by 60% within 12 months and so, or even much worse, did any other tradable asset.
Try to picture this.
You invest $100,000 in AAPL in late 2007 and across the next months your capital decreases to $90,000… $80,000… $70,000… $60,000… $50,000… $40,000!!!
Your capital is going to zero and the headlines are dramatic every single day.
Can you handle it?
The answer must be YES.
It’s simple. By acting objectively and without panicking.
Markets are cyclical – they expand and contract – and there’s nothing to worry about that.
From the chart above you can see that it happened again, in 2012 and in 2015.
What if you closed your position with a significant loss and missed out on the long-term performance?