Whether you are an experienced investor or a new one, it is always beneficial to gain knowledge from someone at the top of the investment game such as Warren Buffet. Throughout Warren Buffet’s annual letters to Berkshire Hathaway shareholders, his speeches and interviews, many advice are to be found. Here we will provide you the best 10 pieces of advice from Warren Buffet:
1. Stick to your circle of competence
Never invest in something your do not understand. You must be aware of the risks and potential rewards of a product and have an understanding of the company you are investing in, for example the financials. Your circle of competence must include the investment itself as well as a broader understanding of its industry. It is better to make no decision than to make wrong decision on investments. Warren Buffet famously never invested in Microsoft even though he is a long-time friend with Bill Gates. He wanted to prove that one must stay within their circle of competence.
2. Diversification and concentation is key
You may have heard the expression “Don’t put all your eggs in one basket” and Warren Buffet’s is definitely an advocate for diversification. A portfolio with only a few stocks or sectors is too risky and unstable. By diversifying across different sectors, you are more risk-averse and can enjoy steady returns over a long period of time.
At the same time, Buffett is a believer that "it’s far better to be approximately right than precisely wrong” and an investor should not put too much time looking for every investment opportunity. Buffett’s firm, Berkshire Hathaway, tends to hold onto what it already owns to ensure the investor does not miss any great opportunities.
3. Be patient
Successful investing is equal parts patience and discipline. Warren Buffett believes that investors should stay invested in the stock market, even when it dips, as it can be rewarding in the long-run. The financial success of a stock is not determined by one day or even one year, but rather over the long-term. Markets come and go, and if an investor moves their money because of a short term problem, it can hurt the return of the stock in the long run. Buying when markets are low and holding onto the investment is the wise way to success. As Buffet says "Forget about the talk shows in the short run, the market is a voting machine, but in the long run, it’s a weighing machine."
4. Invest in businesses, not stocks
Looking at the fundamentals of a stock is vital, and investors should not just be looking for cheap stocks, but also the underlying business. Warren Buffett believes investors should be investing in good businesses that are well-run, with strong management teams and potential for growth, and not just the stock of the company. The stock market is a vote on the ability of the business to grow and make money.
5. Rely on your own judgement
Before making any financial decisions, Warren Buffet recommends investors to take their time to assess the investment and gather all the information they need. Reading annual report is far better than elying on tips, TV shows and other people’s opinion. An investor should be able to think for themselves and assess their investments without feeling pressured to make any sudden decisions.
6. Focus on the margin of safety
The greatest part of investing, according to Warren Buffet, is the margin of safety. This refers to the margin of error an investor should have in their investments. Even if the investor does their research and finds a stock that looks too good to be true, they should continuously look for additional information. When purchasing the stock, an investor should buy with a “margin of safety” that is, an expectation that the stock is well worth more than the price they paid.
7. Avoid day trading
Day trading is a pricey habit. According to Warren Buffett, trading in and out of stocks is not in the most investors’ best interest. It costs a lot in terms of both time and money to dedicate oneself to watching stocks intraday. It is clearly inefficient and can costly over a long period of time. Instead, focus on investing and try to get the best return over several years instead of seeking to outperform the markets in a single year.
8. A wonderful company at a fair price is better than a fair company at a wonderful price
Focusing on the valuation of a stock is important but investors must also pay attention to the company’s fundamentals if they want to be successful in the long-term. A good company with a fair price is worth more than a fair company at a good price.
Thanks to Charlie Munger, Warren Buffet changed his stance on this old Benjamin Graham saying and that explain some of his biggest successes. For example, one of his most successful investment is probably Apple. The reason why is simple, Apple was considered a wonderful company at a fair price, which eventually ended up providing excellent returns.
Warren Buffet advocates for investing in quality companies, businesses with a long-term view and dependable management that could perform even in turbulent times.
9. Be fearful when others are greedy, and be greedy when others are fearful
The market is like a roller coaster and it will go up and down. It is an opportunity to buy low when stock prices drop, and sell high when they rise. If someone decide to sell, it is because they are fearful, which should notify the investor that there might be an opportunity to take advantage of. Likewise, if stocks rise from fear, it is time to take moderate movements and/or review your portfolio to avoid losses. Value investors such as Warren Buffett are taking advantage of that cycle to produce good returns.
10. You don’t need to swing at every single pitch
Warren Buffett famously attend speeches and investment summits where he stress the critical need of an investor to not to just invest in anything just to have a return. Investing requires that the investor allows their money to work for them for a considerable time until they can benefit from their profits. Smart investing means to invest smartly and wisely. Warren Buffett advises to leisurely swing at each used opportunity, especially when they have done thorough research. The saying "You don’t need to swing on every pitch" refers to the need to not to take each lucrative opportunity without good due diligence. A good investor can miss many opportunities, but what is important is the quality of those in which they invested.
Warren Buffet is often quoted saying "Rule No. 1: Never lose money. Rule No. 2 - Never forget rule No. 1."
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