Investing Advice of Warren Buffett

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Welcome and today we will further explore investment advice from Warren Buffett, the man who made a fortune by strategically investing in the stock market. Feel free to check one of the great articles on Buffett’s investment strategy.

Warren Buffett's investing philosophies, which is never lose money, are central to many big and small investing institutes all around the globe. His ideas center around a very sober, thoughtful and diligent approach to very low risk and very high return investing.

“Never invest in a business you cannot understand.”

The advice here is obvious but it is often forgotten particularly after investors have had some success. The temptation to believe that success in one area you know well allows you to easily analyze another area is much greater once you have had some good returns. But you have got to resist this and you need to hold back that line because the critical key to investing is to make sure you do not step out of your circle of confidence. Buffett himself has kept out of technology for a long long time until just recently given its lack of knowledge of the sector.

“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This quote is very interesting and it actually comes from Charlie Munger who is Buffett's partner and this quote has changed Buffett's strategy back in the early 1960s and probably is as much responsible for the incredible success of Berkshire Hathaway as anything else. Let’s go over that again one more time, it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Very frequently value investors will pass on anything they cannot get for a deeply discounted price that is a big mistake which is why Buffett has been asked many times if he is a value investor and said not really. Berkshire Hathaway has taken the completely opposite approach and instead is focused on investing in the best companies.

“If you are not thinking about owning a stock for ten years, do not even think about owning it for ten minutes.”

Investing is not trading. Investing is going out with certainty knowing you are going to make money in the long run. Investing has a vastly different goal. Trading, when done well, is about taking measured risk for discrete periods of time at a kind of sufficient volume to generate profits. When we lose money trading it can be pretty big-time. Investing is about minimizing risk to generate wealth over the long term and when we say minimizing risk Buffett's word for this is certainty. We are going to be certain we are going to make money. Oftentimes when he is asked about why he invests in this company or that one, he basically answers: “Because I think it will be worth more in ten years”. We are interested in the long-term, not the short-term, profits.

“The stock market is designed to transfer money from the active to the patient.’

That is why it is really important not to make impulsive decisions and rather be patient with the market and your investments.

“Remember that the stock market is manic-depressive.”

He talks about how the stock market some days can be extremely euphoric and some days is incredibly depressing. For any consumer of daily financial news this will be true. Equity markets bounce around from day to day on the smallest amount of news, emotional sellers and buyers make rapid transactions and celebrate. It is important not to get caught up in the madness and it is very important you stick to your homework.

“It is not supposed to be easy anyone who finds it easy is stupid.”

This is another quote from Buffett's longtime partner Charlie Munger. It really does say it all. Buffett himself made basically the same point that you do not have to be a genius to be a good investor but there is a lot of hard work. Simple is not easy. We learn to invest by narrowing down the work to the critical kinds of things we have to do.

“Price is what you pay. Value is what you get.”

This is one of the most known things that Buffett ever said. In other words, you do not focus on short-term swings in price but rather you focus on the underlying value of the investment. If you want to think about what that means just imagine you go buy a beautiful brand-new Porsche. What you get is the Porsche and what you paid could have a huge variation. You could pay $50,000 too much or you might get it for $50,000 off if you have some kind of special deal. What you got was the value, you got the Porsche. What you paid could be all over the map and the same thing is true in the stock market.

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

From a man who has made a fortune on companies like Apple American Express, General Motors, Johnson & Johnson, MasterCard and Walmart, this is smart advice. It means that you do not jump in new and shiny companies that do cutting edge technology but rather focus on investing in something boring that is very likely to continue doing what it has done in the past all the way out for many years in the future. It is also important that you should never invest in a transaction where management incentives are not properly aligned with your own. If they make money you should be making money. This does not happen all the time on Wall Street. Be very careful if the guys who are running this company are not eating the same food you are.

“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

This is a great quote. Your average financial adviser is just a guy slaving away and trying to make their kids through college. In other words, just be careful who you trust with financial advice.

“We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis.”

What Buffett is talking about here really warns against over leveraging your investments. The truth of the matter is it is over leveraging your investments by borrowing money to invest and also buying over leveraged companies. Whether it is too much personal debt that you have, you are too over leveraged, or you are investing in a company whose return depends on borrowing a lot of debt. Too much or too costly debt can destroy your track record.

That is all for this time, stay curious, never stop learning and happy investing!