Warren Buffett's Advice for Traders

Apurva Sheth
It may sound absurd to you. How can someone speak of Warren Buffett and traders in the same breath? Let alone same breath, both of them would have never featured on the same line or even on the same page ever before.

On the contrary Warren Buffett would be regarded as one of the staunchest opponents of trading and especially trading from a short term perspective. One of his famous quotes is "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

Now why would someone with that kind of outlook towards markets speak of anything that has got to do with trading? Well, let me confess right at the beginning that he has not directly given any advice to traders but there are some of his principles which equally apply to trading and technical analysis as much as it does to investing and fundamental analysis.

I'll give you some background to this. I am a voracious reader and never miss a chance to read anything interesting. Recently I came across this book - How Buffett Does it by James Pardoe in our library. As soon as I started reading it I was intrigued by the fact that despite the stark differences in both the approaches there were lot of similarities between both trading and investing or fundamentals and technicals.

The book contains Buffett's 24 simple investing strategies which are explained in a very lucid and easy to understand language. Out of these 24 I have selected 12 which directly relate and are equally applicable to trading and technical analysis. I believe these are gems of advice for anyone who is beginning to learn trading through technical analysis. I will speak of 6 of them in this article and remaining ones in the next.

  1. Choose Simplicity over complexity

    Buffett's Advice: When investing, keep it simple. Do what's easy and obvious, don't try to develop complicated answers to complicated questions.

    Advice for Traders: Many a times people think that trading in stock markets is complex, mysterious, and risky and therefore never make an attempt or blindly follow what others have to say. And top it all just because the so called experts want to sell it they will try to make it more complex. On the contrary trading is rewarding even with simple and basic concepts. I strongly feel that complexity might sell but what will make money is only simplicity. And therefore I try to make things as simple and as easy so that you can understand all of it.

    Take technical analysis as an example. Many people think that it is very much complicated and simply avoid it. Those who are trying it would want to add more and more advanced stuff like indicators, patterns, automated systems etc. all at once. They barely give time to the basics and jump straight to complex ideas and when that doesn't work for them they blame technical analysis when the real culprit is their own approach towards it.

    Why go anywhere else. Let me give you my own example. When I began my career in technical analysis, I would push in as many tools and indicators as possible on the chart. My chart would look something like this.

    Pushing in as much as possible
    Source: Spider Software India

    Over time I have realized that every tool and indicator has a purpose and we have to use it only when it is required. And to do that it is very much important to have a basic level understanding of each of the tools and indicators without which you would feel lost in this never ending maze.

  2. Make your own investment decisions

    Buffett's Advice: Don't listen to your brokers, the analysts or the pundits. Figure it out for yourself.

    Advice for Traders: The best person who can take an investment or trading decision for you is 'You' and that is because you are the only person on this planet who will know the most about you. Nobody knows yourself better than you do. You know your emotions better than anyone else. You know the best about your risk-taking capacity which is determined by your financial position. And you also know about your risk-taking ability which has a lot to do with your mental ability to cope with your losses.

  3. Maintain proper temperament

    Buffett's Advice: Let other people overreact to the market. Keep your head when others do not, and you will benefit.

    Advice for Traders: A calm and cool head is one of the most important factor for a trader. A trader should always be in the right state of mind when he is trading. One should always maintain proper temperament when things are not going as expected. The stocks that you bought (sold) may not be moving when rest of the market is moving in that direction. At such point of time it is very much important to stay calm and disciplined enough to follow your process. Buffett says to succeed in markets you only need ordinary intelligence but extra-ordinary temperament.

  4. Be Patient

    Buffett's Advice: Think 10 years, rather than 10 minutes. If you aren't prepared to hold a stock for a decade, don't buy it in the first place.

    Advice for Traders: The advice of holding a stock for 10 years may not go down well with the traders but the key here is patience. How many times have we felt the urge and curiosity to sell the shares just after we have bought it in case it has gone up immediately? I'm sure most of us get this urge to book quick profits, isn't it? We may even go against the process which we have set earlier that would have told us to wait. Irrespective of whether you are a trader or an investor, patience is a skill that you will have to develop. Nobody becomes an overnight success be it a trader or an investor. It takes time.

  5. Concentrate your stock investments

    Buffett's Advice: Avoid the "Noah's Ark" style of investing - that is a little bit of this and a little bit of that. Better to have smaller number of investments with more of your money in each.

    Advice for Traders: This is a problem with most of the traders that I have met. They will keep on buying each and every share that he hears about from anyone without ever considering the growing size of his portfolio and the number of stocks in it. I have seen traders and/or investors who hold portfolios with as many as 100 stocks in it. It is very difficult to keep a close watch on each of these stocks. Buffett advises to have no more than 10 stocks in your portfolio. And that's what even a trader can follow. Not have more than 10 positions at any point of time.

  6. Practice Inactivity, Not Hyperactivity

    Buffett's Advice: There are times when doing nothing is a sign of investing brilliance.

    Advice for Traders: One of the common myths about trading especially is that you have to be constantly getting in and out of stocks to make money. I think that believing in this myth is the worst form of disservice that you can do to yourself and your portfolio. There are times when doing nothing and by that I mean by not taking any position when you aren't sure about the markets and its direction is the best strategy. Most of the bigger mistakes are done when you aren't fully convinced in an idea and still go ahead with it. Traders shouldn't mistake activity for achievement. The only person who makes guaranteed money when you aren't fully sure about what you are doing is your broker.
Would you apply Warren Buffett's investing principles to trading? Share your views in the Club or share your comments here.

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4 Responses to "Warren Buffett's Advice for Traders"
bsraisinghaney
07 Apr, 2015
Excellent advice of Mr Buffetts,but how long you can hold at certain time you have to come out.We can study the advice of broker,some time his analysis is better,but decision should be our.We can study the analysis of broker,because he is also well studied,he also consider all parameters and then analyse,if I thinh that his analysis is correct then I can decide.Holding of shares is not permanent,at point of time we can come out & invest in better preposisionLike 
Nittur Guruprasad
06 Apr, 2015
Make your own investment decisions Buffett's Advice: Don't listen to your brokers, the analysts or the pundits. Figure it out for yourself. Advice for Traders: The best person who can take an investment or trading decision for you is 'You' and that is because you are the only person on this planet who will know the most about you. Nobody knows yourself better than you do. You know your emotions better than anyone else. You know the best about your risk-taking capacity which is determined by your financial position. And you also know about your risk-taking ability which has a lot to do with your mental ability to cope with your losses. Then we need to contact you people and depends on your advice.Like 
Nilesh Doshi
05 Apr, 2015
IThe second advice of Mr. Buffet that make your investment decidecision and do not reply on advice of broker or advisor. In such case why we need your help?? Please reply and do not avoid Like (3)
Anand
04 Apr, 2015
Excellent Advice from the horse's mouth!Like 
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