Warren Buffett's Advice for Traders II

Apurva Sheth
Last time I spoke to you about Warren Buffett's investing principles and how these principles equally apply to traders as well. There are stark differences between both the approaches of trading and investing. But a thread binds both of them together. And that is emotions and psychology. In both the cases one has to keep one's own emotions under check and study the crowd's psychology to profit from their emotions. I think your success or failure in markets will depend a lot upon these two factors rather than the approach you chose fundamental, technical or anything else.

Warren Buffett is the most respected proponents of long term investing and any word that comes from him on investing is regarded as biblical. I spoke to you about a collection of his investing principles and how they equally apply to trading in my previous article. I mentioned the following 6 principles last time and today I will be speaking about the remaining 6.

  1. Choose Simplicity over complexity

    Advice for Traders:KISS, Keep it Simple and Straightforward. Learn the basics of trading and technical analysis and apply them. Complexity may sell but simplicity will make money.

  2. Make your own investment decisions

    Advice for Traders:The best person who can take an investment or trading decision for you is 'You'.

  3. Maintain proper temperament

    Advice for Traders:Stay calm and disciplined and follow your process.

  4. Be Patient

    Advice for Traders:Patience is a skill that every trader has to develop. Nobody becomes an overnight success be it a trader or an investor. It takes time.

  5. Concentrate your stock investments

    Advice for Traders:Don't have more than 10 positions open at any given point of time

  6. Practice Inactivity, Not Hyperactivity

    Advice for Traders:There are times when doing nothing when you aren't sure about the markets and its direction is the best strategy. Traders shouldn't mistake activity for achievement.

    These were the 6 principles that I spoke about last time. Now, I will talk about the remaining 6 principles for traders.

  7. Don't look at the ticker

    Buffett's Advice: Tickers are all about prices. Investing is about a lot more than prices.

    Advice for Traders:Warren Buffett doesn't own a stock ticker system. He doesn't track prices on an hourly, daily or weekly basis. Simply put Warren Buffett doesn't bother much about short term price deviations. However, as traders we make money out of these short term price fluctuations. Then why did I added this point to the list? I have observed that most traders are hooked on to the ticker on the television screen or cell phone once they are into a position. They check prices every few minutes and sometimes even seconds once they are into a stock. Doing this not only distracts you from the other work at hand but will also add up to the anxiety levels. I can tell you for sure that you are more likely to break your own rules and processes that you had set before trading when your anxiety levels are high. Anxiety will most likely lead to a wrong decision. Thus, one should do adequate research for the stock before taking a position and let it run its course once you are in it.

  8. Stay within your circle of competence

    Buffett's Advice: Develop a zone of expertise, operate within that zone, and don't beat yourself up for missing opportunities that arise outside that zone.

    Advice for Traders:Warren Buffett did not invest in high tech companies during the tech bubble in 2000 simply because he couldn't understand their businesses. Traders should trade only what they feel they are most comfortable and competent with. For example many people try hands at intraday trading just because their neighbor or friend made money from it and think that they can do the same. The same goes with trading in instruments like futures and options as well. These are leveraged products and have the potential to make or break your portfolio. One may be comfortable trading only in currencies and not in commodities or equities. A trader should stick to the areas where he is competent and when trying new things he should equip himself with proper knowledge before making a decision.

  9. Be Fearful when others are Greedy & Greedy when others are fearful

    Buffett's Advice: You can safely predict that people will be greedy, fearful, or foolish. You just can't predict when or in what order.

    Advice for Traders:This is one of the best piece of advice coming straight from the horse's mouth. If you want to profit from trading you have to trade based on others' emotions rather than trading on your own emotions. Traders should be able to analyze the crowd's psychology. I have been doing this with the help of price charts for quite a long time. I have showed you with examples how volumes help us determine an emotional extreme where people sell out of a stock at any cost. This creates a selling climax which is most likely to be a bottom for the stock. This setup allows us to act greedy when everyone else is fearful.

  10. Read, Read some more and then think

    Buffett's Advice: The world's greatest investor spends about 6 hours in a day reading and an hour or two on the phone. Rest of the time, he thinks.

    Advice for Traders:Reading is a habit that every trader should inculcate. Reading enables us to broaden our horizons and think on lines we have never thought before. Reading is probably the best source to upgrade ones knowledge and sharpen ones skills. Traders can choose books or articles from a wide range of subjects like technical analysis, quantitative analysis, algorithms, behavioral finance and crowd psychology.

  11. Use all your horsepower

    Buffett's Advice: Smart people often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200 horse power engine is a lot better than someone with a 100 horsepower output from a 400 horsepower engine.

    Advice for Traders:Financial success is a matter of having the right habits. Habits effectively determine behavior and good habits lead to good behavior. Buffett suggests that people should conduct an exercise to check the efficacy or 'output' of their own engine. For a trader it is very much important to review his trades at regular intervals. A trader has to plan his trade and then see whether he is trading according to his plan. A trader should create a habit of recording his trades in a trading journal and making notes before, during and after the trade. This will help the trader identify his strengths and weaknesses. By developing the strengths and working on the weaknesses you can ensure that your output matches your horsepower.

  12. Avoid the costly mistakes of others

    Buffett's Advice: Learn from other guys mistakes. There's no reason to live through an unhappy drama that someone else has already lived through.

    Advice for Traders:The financial market is not a place where we can afford too many mistakes. You may find yourself in the midst of a financial accident at the blink of an eye. With limited capital at our disposal, how many mistakes can we make? Traders can take inspiration from other traders' success but they should never forget to learn from others failures as well.
How do you apply Warren Buffett’s investing principles? Share your views in the Club or share your comments here.

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2 Responses to "Warren Buffett's Advice for Traders II"
P.Malakondaiah
08 Apr, 2015
Dear Sir, it an excellent explanation and is educative . Please continue this piece of work to inculcate good habits in people like me.Thanks and Hats off to U sir.Like 
UMESHA H N
08 Apr, 2015
It is eye opening for me may be for many,I was reading all your articles and I like your writing skills You are making complicated things very simple and easy. I used to waste lot of time watching live market and loosing money. After reading this I will not watch the ticker from today Thanks for giving me a great information Like 
We request your view! Post a comment on "Warren Buffett's Advice for Traders II". Click here!