Anyone who follows the business world, finance, and investing has heard of Warren Buffett.
He is no doubt of the world’s greatest investment minds of all time. His company, Berkshire Hathaway, has an investing track record that is simply astounding. The compounded returns all the way from 1965 has averaged close to 21%. Buffett has offered a ton of advice during his investment career.
I will touch into 10 important lessons anyone can learn from his vast wisdom and experience.
The first lesson is one of SIMPLICITY. Buffett says that you should understand the business you are investing in and how it actually makes money. That way, you can see when it is a good investment and when it is not by being able to analyze it better.
The second lesson is to START EARLY. Start investing in equities at a young age and with the power of compounding interest, you will be able to get rich over time. You will also be able to recover from market drops with a long-term investing horizon.
Next, know that CASH IS KING! Cash flow of companies is very important for their probability. Debt can be a killer. Also, if you have cash on hand to invest, then you are able to pick the best investments and buy when the time is right.
Fourth, FUNDAMENTAL ANALYSIS TRUMPS TECHNICAL ANALYSIS: understand the financial statements of a company and its intrinsic value, don’t just think you can look at a stock price chart and think it has all the information you need. Over the long turn, the price of an investment will reflect the fundamentals of a company.
From the fourth lesson, comes the fifth: BE CHEAP! Buy companies at reasonable valuations. Over time, companies reflect an average valuation. Buy a good company at a fair or even a cheap price. Don’t overpay for your investments.
Sixth, BE SELECTIVE when choosing your investments. Buffett once said that you should look at your stock buying like a punch card with a limited amount of punches you can take. Maybe even just 20 over your investing career.
Nest, if you are following lessons five and six, FOCUS ON THE LONG-TERM. There are always going to be short-term fluctuations in equity prices. These reflect emotions, bad news, good news, and whatever is the flavor at the moment. Unless the fundamental nature of the business changes, don’t panic and sell, or be in a rush to buy.
Seven, DON’T BE AFRAID TO BE A CONTRARIAN. A contrarian is someone who will go against the market consensus or the current investing environment. This could be selling when there is mania and stock prices are sky high and overpriced and then holding the cash to invest in a great company at a cheap price that may just be struggling for the short-term. Or it could be the brave act of buying when everyone is selling because you are getting once in a lifetime bargain pricing on great companies.
Next on the list is to BE UNEMOTIONAL WHEN CHOOSING INVESTMENTS. Don’t buy a stock because it is a popular company, or because everyone is buying it. Don’t sell because of the market downturn. Base your decisions on logic and good financial data.
Remember this next lesson: DON’T TRY TO TIME THE MARKET! Buffett says Mr. Market is always right. In the long run, prices will return to average valuations, while over the short-term anything can happen. Tune out all the “noise” and information overload you see from the financial press and focus on your plan to find great companies at fair to cheap prices.
Lastly, and number ten on the list is to AVOID PAYING HIGH FEES. Over an investor’s lifetime, fees can take a huge chunk out of your overall returns. Look for companies that charge less and take out less in fees. This is sometimes called the biggest secret in the investment world that the average investor doesn’t pay attention to at all. I would lump TAXES as a part of investment fees. Do things that reduce your tax liability which will, of course, boost your returns over time.
Buffett stuck to these principles and many more to get to where he is today. Although they may seem simple enough to follow, many of us will get off track. We can hurt our long-term investing track records by thinking we can always beat the market. Even Buffett has not beaten the market one hundred percent of the time. But he was able to whip the market during bad times by not losing big when times are tough. That’s why he is still around today and one of the greatest investors of all time.
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