7 Great Investing Lessons from Warren Buffett


warren buffett investing lessonsWarren Buffett is arguably one of the greatest investors of all time. He preaches value investing, in which he seeks out companies whose stock price is undervalued. While I may disagree with his views on taxation, I cannot argue against his thoughts on investing.

At his annual meeting for Berkshire Hathaway this year, attendees were blessed with some nuggets of his investing philosophy. To me, this is like free money. After all, if you want to be a millionaire, you talk to millionaires to see what they did to make their money (or in the case of Buffett, billionaire). Therefore, when the greatest investor of our lifetime gives you investing advice, you better write it down.

Investing Lessons From Warren Buffett

1. Stay Sane While Others Go Crazy

During the meeting, Warren Buffett said that the average investor can expect to four or five serious market declines in their lifetime. The key is to have the mental strength to take advantage of them.

Based on this, I have seen two in my lifetime, the dot-com bubble and the housing bubble. That means I can expect to see two to three more serious market declines in my life. As he pointed out, the key is to have mental strength during these times.

This means that when the sky is falling, you have to have the mental strength to stay in the market. Until you sell, all of your losses are just on paper. You don’t realize any loss (or gain for that matter) until you sell. So even though your 401k statement shows you lost $10,000 last quarter, that is just on paper. Have the strength to stay invested so that you can earn a higher return than the average investor.

It also means that you need to invest more money into the market when it is falling. This seems counter intuitive to most, but use this analogy: pretend stocks are food at the grocery store, when stock prices fall, it is the equivalent of food being on sale. Everyone loves a sale right? So stock up when the market is dropping. Once you can make this connection, when the market drops, you won’t get overly emotional and do something you shouldn’t.

“Accumulate shares over a long period, and never sell when the news is bad and stocks are well off their highs,” Buffett writes. “Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

2. Stay Within Your Circle of Competence

Warren Buffett tells investors who don’t have time to research stocks to stick with low cost index funds. He says he has no issues with passing on stocks whose fundamentals seem too difficult to understand. In fact, he’s left specific instructions in his will regarding his wife’s inheritance. He’s directed the trust to invest 10 percent in short-term government bonds and 90 percent in low-cost index funds.

Sounds pretty boring to just limit yourself to low cost index funds, but the strategy works. I always go back to the argument that there are people whose full time job is to research companies and make investment recommendations based on their research. Even then, they have a 50-50 shot at predicting the stock movement correctly.

So what makes you, who devotes a few hours on Saturday morning to picking stocks, think that you can do better? Odds are you can’t and you won’t. After all, picking individual securities isn’t a great determinant of investment performance.

3. Ignore Forecasts

No one, not even Warren Buffett or the president, knows what path the economy will take in the future, so it doesn’t make sense to base your investment decisions on forecasts.

This is a great point. If you watch the 24 hour business news channels, all they talk about are economic forecasts. The ironic thing is that the stock market is a leading indicator, meaning that it will turn out of a bear market before there are many other signs that the economy recovering. The same goes for entering a recessionary period. Instead of investing based on the economy, you should stick to a sound, long-term plan. There will be bumps along the way, but it is still the way to get to you destination.

4. Recognize Your Limitations

One of the toughest lessons a leader has to learn is when to ask for support. If no support is available, leaders should stick with what they know will succeed. Warren Buffett has the same advice for investors that he offers to future business leaders: Recognize your limitations.

“You don’t need to be an expert in order to achieve satisfactory investment returns,” Buffett told his shareholders. “But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.”

To illustrate, Buffett discussed two real estate investments he’d made: a farm in Nebraska and a commercial building near NYU. He reasoned that farmers would always grow corn in Nebraska, and students would always come to NYU. Therefore, the investments had a good chance of making money, even though he knew nothing about the specifics of farming or property management.

You don’t have to know everything about a venture if it’s safe, proven, and likely to succeed.

5. Focus on Future Productivity

Warren Buffett’s philosophy is simple: Buy investments that will generate good long-term value, and buy them for a reasonable price. Instead of buying an investment based on recent past performance or market predictions, he encourages investors to focus on the asset’s future productivity. When he and investing partner Charlie Munger purchase stocks, they start by making reasonable estimates of what the companies will earn five years from now.

When they can estimate earnings five years out as well as further into the future, and the earnings look good, then they check the stock price. If the stock is selling for a reasonable price when compared to the bottom boundary of their earnings estimate, only then do they purchase the stock and hold onto it. Buffett says most of the time they can’t make a reasonable earnings estimate. When they can’t, they move on to other prospects.

Interestingly, Buffett doesn’t bet much on international businesses. Even during financial crises, he bets on the ingenuity and productive assets of American businesses.

6. Avoid Price Speculation

The next of Buffett’s investment advice is to warn against trying to time prices against market fluctuations. He says that there’s nothing wrong with price speculation, but few people are actually good at it. “Half of all coin-flippers will win their first toss,” says Buffett. “None of those winners has an expectation of profit if he continues to play the game.” People live off of the thrill of the win, but they’re rarely honest with themselves about whether they actually turn a long-term profit when speculating.

If you like the risk of speculating, set aside a small portion of your portfolio for trading purposes. Otherwise, buy value investments at good prices now, and don’t wait for the market to bottom out.

7. Don’t React to Market Pundits

Many investors rely on hot tips from their brokers, or they try to snag huge windfalls by listening to investment pundits. Warren Buffett does the opposite. He invests in well-run businesses and in good situations instead of timing market ups and downs.

“When I hear TV commentators glibly opine on what the market will do next,” Buffett wrote, “I am reminded of Mickey Mantle’s scathing comment: ‘You don’t know how easy this game is until you get into that broadcasting booth.’” In other words, never let pundits’ guesses about market movements guide your investment choices. If you make wise investments, they won’t be hurt over the long term by fluctuations in interest rates, economic growth, and short-term stock market movements.

Final Thoughts

The interesting thing about investing advice from Warren Buffett is that it isn’t anything complicated or things you haven’t heard before. It is simple, sound advice. Too many times we make investing much more complicated than it needs to be. This is because we let our emotions to get involved and guide us, instead of listening to sound reasoning.

This is one of the reasons why I suggest people hire a financial advisor. If you can find an advisor that follows these principles and doesn’t make 1,000 trades every day, the fee you pay him is priceless because he will help you to not give in to your emotions.

I know of a man that invests with a high net-worth financial planning firm. He pays somewhere between 0.50 – 0.75% for them to manage his money. He has been with the firm over 20 years. He said he went back and totaled up the fee’s he paid this firm. In 20 years, the total came to roughly $100,000. I was shocked at this. But what was more shocking was when he told me he would have paid twice that much. He knew there was no way he could have done it without this firm. They kept him calm during the dot-com and housing crashes as well as during the crazy late 1990’s. I’m not telling this story to get you to hire a financial advisor, I am telling it to you because sometimes, we need someone to help us meet our goals.

If you opposed to hiring an advisor, another option is to use a firm like Betterment. They are a different firm in that they use the power of automation to help you be a successful investor.

Regardless if you hire an advisor or not, be certain to practice what Warren Buffett preaches, or even Benjamin Graham for that matter. When it comes to investing, his insights on being successful are priceless.

Be sure to read my 20 awesome investing quotes, which not surprising, contain a quote or two from Warren Buffett himself.

15 thoughts on “7 Great Investing Lessons from Warren Buffett”

  1. You’ve got to love Buffett! I have been to several of the annual meetings now and always enjoy hearing him talk greatly. The first point is so counterintuitive, but it’s absolutely brilliant. I try to have the same mindset and was able to benefit from that after the housing bubble.

  2. Digital Personal Finance

    I enjoy Buffet sayings and related tips. These are good ones, and there is a different one in particular that I’m thinking of for a post idea…

  3. My Financial Independence Journey

    For me the biggest point is staying sane. Just let the market do whatever it wants. There will always be something worth buying, you just have to hunt around for it.

    1. Good point. Another way to look at it is even when the market is dropping, someone is buying. You can’t sell a security without someone else there to buy it.

  4. I like the guy a lot. Yeah, don’t get too desperate to hit it big too fast. Take your time and remember that every great things comes from small beginnings. So take it slow, one step at a time. I agree with Nick about consistency. No matter what happens, just keep going.

  5. I totally agree with those amazing Buffetisms..and I like his philosophy on taxes too 🙂

    I’ve been to 3 Berkshire Hathaway annual meetings to hear it from the horses mouth. He really walks the walk and it shows in the amazing CAGR Berkshire Hathaway has yielded since Buffet took the helm.

  6. Mr. Warren Buffett is a really inspiring and great man. He’s my idol, hope to do some of the things he has done when I start investing soon.

  7. Staying sane while others go crazy is probably my favorite bit of investing advice. I have made a lot of money in the aftermath of the housing bubble because I bought low while others were selling. The “market” is generally stupid and you should definitely take advantage of it.

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