Trade Binary Options like Warren Buffett
I was posed a peculiar question not to long ago on the popular BOD forum. The question was about a comment made by the famed investor Warren Buffett and what exactly did he mean by this. I share my interpretation of what he meant by this statement below in the following article. Most of what I believe about MR. Buffett's trading style is based on reading a book by his former relative. I think you can apply this principle to your own Binary options trading as I mention in this Tutorial..
Warren Buffett's strange statement:
“Diversity is protection against ignorance. It makes very little sense for those who know what they’re doing.”
OK for those of you that may like my little tutorials but wish they were longer today is not your lucky day. I still did not really get a chance to go back and read my Buffettology book but rest assured if I had this would have been a novella but I think it might be better this way because it just so happens everyone is talking about MR Buffett's acquisition and it is a PERFECT EXAMPLE of what he means by that statement.
WHY The F should I read all this?
This chat is a great exercise in the thought process of one of the greatest or arguably the greatest investor of the 20Th century. I know most people always look for indicators and secret strategies etc but really IMO you will benefit greatly by learning to condition your mind to similar thought processes of these highly efficient people.
Warren Buffett on diversification:
OK first let me point out that MR Buffett is arguably the greatest investor of the 20Th century. He started his investing career with $105,000 and just yesterday done a 28 Billion Dollar Merger and acquisition deal for Heinz. The deal is a great example of how he invest. I don't think he is frowning on the idea of diversification in the quote above he is just saying that in the grand scheme of things what you want to do is find a system of investing that works for you and do it consistently.
Warren Buffett was a student of Ben Graham another very successful investor of his period. Graham was a value investor and he and Mr Buffett are effected little by news and day to day hot buzzes in the markets and instead opt for value and companies they understand. Now while Mr Buffett has amassed a substantial fortune he just buys the same companies again and again in different consumable niches. There is no diversity in that respect because he looks for what he calls consumer Monopolies: A company making consumable goods for the masses that has such a strong market share that no one can compete with them. They can set their own price and are in his views from another planet compared to other companies selling the same consumable products or services.
Some examples of his investments have been:
Do you see any names there that you have never heard of? Nope and BTW notice he avoided the tech bubble when everyone was so big on the PC and even now Apples decline.The companies above are different companies but really they are mostly diverse in name more so than anything. Now over the years his style of investing has not changed but it has evolved. You see 30 years ago he might have tried to find a company that was a consumer monopoly Say a newspaper that was the only one in an area and could set it's prices a bit higher if it wanted because of it's quality and position in that market. See the beauty of this is that if needed this company has all the tools.
To grow margins
collect residual income
( consumable goods are consumed and have to be repurchased )
and likely has brand recognition no one can come close to touching
Now do you see why he would say there is no need for diversity? He like most Institutional investors has a plan not just a trade and not even picking companies based on predicting success. They are successful and will remain so most likely and that consistently resulted in profits. The only thing that has changed is that he is now willing to pay more instead of early on where he would wait and let the price of a company that fit his Consumer monopoly profile come to him.
OK I have to mention that when I grasped the thought process he had it actually made me think of a Famous Female Investor Hetty Green because another thing Mr Buffett is famous for is his modest life style choices. Before Buffett Hetty Green was a value investor on wall street in its early years and is the first noted woman to influence the market strongly because while others looked to news and short term trades she would gather up valuable company shares based on a model similar to Mr. Buffett's, well to be fair his and Ben Graham's investment styles were more likely inspired by hers. Then at the point where investors wanted share in these valuable companies that she literally collected almost complete ownership in she would be able to name her price almost.
You see the thing all of the people I am mentioning had in common is they are not predicting they are just investing in what they understand and because of that understanding they can ascertain value ( which in itself is a rare commodity back then or now ). In the early 1900s Hetty was dubbed the witch of Wall street by her male investor counterparts as she repeated her process over and over again.
How to be the Buffett of Binary options!
Well I know some guys dont want to hear this but in spite of all the different assets etc some companies offer really you only need one LOL. You need to spot conditions that are profitable with that one asset again and again on that one asset at first.
A) one asset means a lot less fundamental news to keep up with
B) one asset means learning to spot important price level easier and more consistently the more you work with it
C) One asset means you gain a deeper understanding of that asset and how it reacts to news and indicators and seasonal data.
When you have a better understanding of what to look for with that asset then you can evolve into a few more but you want be diversifying either because you will have a plan and system based off of trading that one asset that leads you into the same trading style and the only thing changing is the name of the Asset. That IMO is where Mr Buffett is at now and what he was talking about as he is still simply buying consumer monopolies to this day. In a way Warren Buffett's company is an example of a consumer monopoly and you can still buy a share in Warren Buffet's Berkshire Hathaway if you can come up with roughly $150,000 for one at this point. I hope this chat sheds more light on the thought process of highly effective financial players and as always if Alfred is Talking Markets you can take it to the bank.