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Stock Investing Tips From America's Third Wealthiest Man

No one is more successful in investing and playing with stocks than Warren Buffet, the third wealthiest person in the United States with a net worth of $87.5 billion as of February 17, 2018. He is also currently the chairman and CEO of Berkshire Hathaway, a multinational holding company that owns wholly or in part global brands such as Helzberg Diamonds, Dairy Queen, Kraft Heinz, Coca Cola, and even Apple.

So for the stocks newbie, take cues from the king of stocks himself, who shared three simple tips on growing your investment in a letter to Berkshire's investors last week.

Buffet's first rule in choosing which companies to keep investing in is to always view the stocks as businesses and not just tickers. For Warren, investing in stocks is not just a matter of buying and selling at the moment when the charts fluctuate or when the media comes out with something explosive or controversial. For him, when he invest in a stock, he believes and invests in the potential of the business—both in the short and long term. Good businesses will be good investments in the long run.

"We simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back," Buffet said.

Long-term investments have become a favorite of Buffet, who emphasized his point to avoid rapid-trading high-fee investments. Investment advisers and fund managers have become popular in the stock-trading industry and many of these offer their services and products at high fees.

Instead of taking this bait, Buffet suggests owning a broad basket of stocks and holding them for a long time than falling for rapid-trading strategies employed by many hedge fund managers.

To prove his point, Buffet recalls a bet he made in December 2007 where he said that a low-cost index fund tracking the S&P 500 stock index would be more profitable than five high fee-run hedge funds that invested in other hedge funds over a 10-year period.

After December 2017, Buffet proved himself right. The S&P 500 won handily, posting average annual gains of 8.5 percent.

And no matter what kind of strategy or business or stock you decide to pursue, Buffet's biggest advice is to never use borrowed money to invest in stocks, no matter how much faith you have in the business. According to Buffet, plunging stocks are risky for individual investors who seek financial aid for their investments because it can cause panic. Losing money you have is significantly different from losing money you still don't own.

"This (data) offers the strongest argument I can muster against ever using borrowed money to own stocks," Buffet said about a chart he included in the letter that showed Berkshire's value plummeting 37.1 percent in 1987.

"There is simply no telling how far stocks can fall in a short period," he continued. "Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."