Brian Beers* says billionaire Warren Buffett’s first stock purchase illustrates two vital principles of successful investing: patience and the importance of timing.
Billionaire Warren Buffett, also known as the “Oracle of Omaha,” is considered one of the most successful investors in the world.
He is the long-time Chairman and CEO of Berkshire Hathaway.
Buffett was born on 30 August 1930 in Omaha, Nebraska.
As a youngster, Buffett reportedly showed great interest in stocks, going so far as to write stock prices on the chalk board in his father’s office.
The first stock Warren Buffett ever bought
Warren Buffett’s first-ever stock purchase illustrates two very important principles of successful investing strategies: patience and the importance of timing.
At the age of 11, Buffett went into the stock trading business with his sister, Doris, buying six shares of Cities Service, an oil service company, at $38 a share.
Buffett had identified Cities as an undervalued stock and was confident of making a nice profit for himself and his sister.
Unfortunately, the stock lost almost a third of its value within just a few weeks of Buffett purchasing it.
Despite his sister berating him continually about their dwindling fortune, Warren held on to the stock until it rebounded to $40 a share, when he closed the trade for a $2 per share profit.
After cashing in, he then had the unpleasant experience of watching the stock rise to over $200 a share without him.
The importance of timing in investments
Buffett’s experience is a good example of the importance of timing in investments.
Another legendary stock trader, Jesse Livermore, stressed the point that it is nearly as important for an investor to be right in their timing as it is to be correct in their directional forecast.
A stock may indeed be going to advance from $50 to $100 a share, but time and again investors have lost money buying it while it was first dipping down to $20 a share, only to then, like Buffett, watch it finally take off without them.
Successful investing requires that traders be correct in their overall forecast for a stock and that they enter the market at the right time to realise a profit.
Smart investors wait for market action to confirm their investment hypothesis before entering a position.
Patience is indeed a virtue for investors.
Buffett showed good patience in waiting for the market to come back in his favour, but he failed to be patient enough to take full advantage of the stock’s profit potential.
Having successfully weathered the storm, he failed to observe the adage, “Let profits run” — even though he did make a small profit on his very first stock trade.
* Brian Beers is Editor of Investopedia. He tweets at @brian_beers.
This article first appeared at www.investopedia.com.
