Warren Buffett’s investment advice is timeless. By keeping Buffett’s investment advice in mind, investors can avoid some of the common pitfalls that hurt returns and jeopardize financial goals. Below are 10 pieces of investment advice from Warren Buffett.
Warren Buffett is famous for not only being the greatest investor of all time but also being widely quoted and followed by many. He has many great quotes, and the world looks at him for wisdom, mainly in periods of great tension and distress in the markets and economy.
He has lived, and invested, for many periods of time, which allows him to have a great perspective on the world and investing.
10 investment advice from Warren Buffett
1. Invest in what you know… and nothing else
One of the easiest ways to make an avoidable mistake is to engage in overly complex investments.
“Never invest in a business you can’t understand”
This does not mean that you cannot invest in companies which business you don’t fully understand, but you should proceed carefully and study them well.
Everyone has some edge in something. If you work for a tech company, you may know well how the tech sector is doing and have an edge in understanding the companies. If you work in a shoe factory, you may have insights in which companies are thriving and have more chances of success.
2. Never compromise on business quality
While saying “no” to complicated companies and industries is simple enough, identifying high-quality companies is much more challenging and difficult even for professionals.
“It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Here Buffett points out that you shouldn’t put business quality aside when valuing the company, and you should not buy a company regardless of price.
“Time is the friend of wonderful businesses, the enemy of mediocre ones”
3. When buying a stock, plan to hold it forever
Warren Buffett clearly adopts the buy and hold mentality. He held some of his shares for several decades.
“If you haven’t thought about owning a stock in ten years, don’t even think about owning it for ten minutes.”
Another quote related
“Our favorite waiting period is forever”
and another
“The stock market is designed to transfer money from the impatient to the patient.”
But buy and hold does not mean buy and forget and also does not mean never selling it. But it means that you plan to hold it for as long as you believe the company is poised for success. He has sold many companies along the way, but his greatest results came from the ones that he kept for a long time.
4. Diversification can be dangerous
Warren Buffett currently has more than 46 stocks in his portfolio of public companies, but he says that.
“Diversification is a protection against ignorance. It makes very little sense to someone who knows what they’re doing”
Warren Buffett is against extreme diversification, something like 100+ assets. But we have to keep in mind that he has over 50 years of experience and picking stocks is his job.
Diversification can be good, if you are not a professional investor that is the whole day studying the companies, you will surely be ignorant (even the pros are). Ignorance is not a bad thing, thinking that you are not is the worst thing.
5. Most news is noise, not news
If you worry about all the news, you will go crazy.
“Remember that the stock market is a manic depressive.”
As investors, we need to ask ourselves whether the news really affects our company’s long-term earning power. Companies report results quarterly, and even that does not change much. So why keep looking at the investments daily?
The newspaper business is to sell you newspapers, signatures, or even ads. They are not there to help you make great investments. So keep an eye on what you read and try not to be affected by the noise.
6. Investing is not rocket science, but there is no “easy button”
One of the biggest misconceptions about investing is that only sophisticated people can successfully pick stocks. Equally important, investors should be aware that there is no magic set of rules, formulas, or “easy button” that can generate better results than the market. It doesn’t exist and it never will.
“You don’t have to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ”
The most difficult thing is consistency. Consistency is not complicated, complex, or difficult to understand. It is just difficult to do. If you are able to keep consistent throughout the years and even decades, your chances of success are very high.
7. Know the difference between price and value
Investors love to fixate on quotes, but quotes are much more volatile than company fundamentals.
“Price is what you pay. Value is what you get.”
Stock prices fluctuate with investors’ emotions, but that doesn’t mean a company’s future cash flow has changed. The market moves according to expectations and future events. But as we already said, the companies only publish results every quarter, so why the prices change so much during this period?
8. The best plays are usually boring
Investing in the stock market is not a get-rich-quick path. Investing is not to be exciting, but to raise capital in the long term.
“Beware of investment activity that produces applause; big moves are usually greeted by yawns.”
The biggest results come from companies that just keep delivering through the years. If everyone in the BBQ that you went to is talking about a specific stock, be careful with that.
9. Low-cost index funds are suitable for most investors
Most investors fail when trying to beat the market. We undermine our performance in many different ways – trying to time the market, taking excessive risks, trading emotions, venturing outside our circle of competence, and more.
“My advice to investors couldn’t be simpler: put 10% of your money in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe that the long-term results of the confidence of this policy will be superior to those achieved by most investors – whether pension funds, institutions or individuals – who employ managers with high fees.”
Everyone thinks they are better than average, but that is not mathematically possible. So, if you don’t think you have an edge, sometimes is better to go with the average.
Also, not everyone has a life goal of keeping up with the companies that they invest in, they just want to save for the future and have time to enjoy life. That is also a great motive to index.
10. Only listen to those you know and trust
Throughout his letters to shareholders and occasional interviews, Warren Buffett emphasizes the importance of investing only in competent and trustworthy management teams.
“We have long felt that the only value of stock analysts is to make fortune-tellers look good.”
and one more quote.
“Wall Street is the only place people ride in a Rolls Royce to get advice from those taking the subway.”
Also, keep in mind that looking trustful is different than being trustful.
Concluding
By adopting some of Warren Buffett’s investment advice, focusing on the long term, and holding dividend stocks, we can better manage our portfolios to reduce the number of costly mistakes we make and continually move closer to achieving our goals.
Happy investing!