There are people in the world who are best known for being famous for being famous.
Think Kim Kardashian and Paris Hilton.
Warren Buffett is not in this crowd (thank goodness!).
He is widely considered to be the most successful investor of all time. He is one of the very wealthiest people in the world – often THE wealthiest, depending on stock market valuations.
He has gotten to where he is by being a brilliant and insightful investor.
Like me, he wasn’t born into money, and he didn’t sign a fat contract for a book, a movie, a TV show or a record deal. (Note: I did sign a contract for my book deal, but I assure it wasn’t fat. Far from it. Haha…)
He did it the old fashioned way, which in today’s world seems almost radical.
In fact, there is nothing fancy or unusual at all about Warren Buffett – other than his phenomenal success.
That, and his overwhelming common sense, are the reason why so many people study his life and follow his lessons. And that’s why you should to.
Though he came from humble beginnings, Buffett is today the chairman, chief executive officer, and the largest shareholder of the multinational conglomerate holding company, Berkshire Hathaway.
His advice and pronouncements have become legendary, earning him the nickname “The Oracle of Omaha.”
What are some of the lessons that we can learn from this “oracle“?
1. Never Lose Money
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.“ – Warren Buffet
What makes it impossible to say that you are never going to lose money, is that it would mean that you would never take the calculated risks that are necessary to make money in the first place. But that’s the whole point – taking calculated risks.
Buffett doesn’t take wild chances. He has specific criteria in regard to any business that he will invest in, and this method keeps him from entering blind speculations.
If you use the never lose money mantra as a foundational strategy, it will have a positive effect on everything you will do, whether it has to do with a business or with investing. Many of the lessons that will follow will outline exactly how Buffett avoids losing money in the first place.
2. Buy Businesses – Not Stocks
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.“ – Warren Buffet
Despite being perhaps the most successful investor in stock market history, Warren Buffett never actually bets on stocks, at least not the way that most investors and even fund managers do.
Buffett looks not at the performance of a given stock, but at the performance of the underlying business. This is critical, because a strong underlying business means that an investment will almost always payoff, at least sooner or later.
The reason why most investors fail to follow Buffett’s advice in this regard is because it requires a lot more work. You actually have to research the individual companies, and have a keen understanding of their business and how well they are faring against the competition. Market sentiment of the company’s stock has little to do with it.
3. Be in the Game For the Long Haul
“Someone is sitting in the shade today because someone planted a tree a long time ago.“ – Warren Buffet
When you look at the companies that Buffett either owns individually, or through Berkshire Hathaway, they’re all long-term investments. Buffett will buy stocks and hold onto them – not for years – but for decades. As long as the business is strong, the investment will payoff. Buffett’s track record, and the size of his portfolios, are testaments to the success of this strategy.
4. You Are Ultimately Responsible For Your Success or Failure
There are a lot more people in the financial markets then there is understanding of those markets. For this reason, people hold their investments through mutual funds, or pay for the services of investment advisers. Buffett holds that there is no substitute for getting involved in your investments.
Whether your investments succeed or fail will be completely on your shoulders, and not on those of your investment advisor. He maintains a policy of learning all about an investment and taking complete charge of how you go about managing it. In addition to being a solid strategy, this is also the only way that a novice investor learns to be an expert.
5. Keep Tight Control Over Your Living Expenses
If you look at the most successful people in almost any endeavor, you will typically see that they are people who live the life. That is, they live a lifestyle that is consistent with their level of success. This often leads to more than a little bit of lifestyle inflation, which helps explain how so many super successful people end up in a bankruptcy, and eventually, even the poor house.
Warren Buffett has done an outstanding job of keeping his ego in check when it comes to his lifestyle. It can even be said that he uses the same value principles for investments that he does in managing his own personal finances. For example, Buffett still lives in the same five-bedroom stucco house be purchased in Omaha Nebraska in 1957 for $31,500.
It’s certainly a nice enough house, but it doesn’t come close to the palaces that people who are nowhere near as wealthy as Buffett tend to live in. There is a strong message in that arrangement.
6. Invest in Quality
One of Buffett’s hallmark investment strategies is a investing in quality. This means that he invests in companies that have well-known, well-regarded products that add value to the consumer and the economy. The companies he inverts money in are usually household names, which is to say that they have both strong market penetration and brand recognition.
Many less successful investors are drawn to companies and industries that they know little or nothing about. They assume that the less they know, the more likely it is that the investment will be a success, as though it will succeed based on some unexplained mystery factor. Quality – not mystery – makes a company a long-term winning investment.
7. Buy Value
We can think of buying value as buying quality – when it goes on sale. This is part and parcel of Buffet’s never-lose-money strategy. Simply put, Buffett never pays full price for anything, including the investments that populate his portfolios.
He does this by buying companies that are selling at a discount to their real value. This strategy is more commonly referred to as value investing, which is the practice of buying stock in companies that are undervalued compared to other companies in their industry, as well as to the general market.
Buffet has this down to a science. He looks at the fundamentals of a company – it’s earnings, revenue, price-earnings ratio, return on equity and dividend yield, among other metrics – then he compares them to the same metrics in competing companies. If the company is generally strong compared to the competition, but the stock price is well below them, it becomes an investment candidate.
8. Avoid Fads
One thing that is immediately obvious about Buffett is that you’ll never see him running with the herd. That means no “Nifty Fifty” stocks, no hot stock of the year investments – and nothing that even hints at being trendy.
As an example, Buffett has publicly stated that he avoids buying stock in new social media, like Facebook and Google, citing the difficulty in determining their value and how they will fare in the future.
We can also bet that participating in fads would get in the way of investing in quality and value on a long-term basis. If it’s one thing Buffett is, it’s consistent.
9. Buy When “The Blood Is Running in the Streets”
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.“ – Warren Buffet
I just said that you will never see Warren Buffett running with the herd, and this one of the best examples. His investment philosophy is simple – buy when everyone else is selling (be greedy), and sell when everyone else is buying (be fearful). This is consistent with the Wall Street saying (that few investors ever follow), the crowd is usually wrong.
This strategy is very consistent with Buffets strategy of buying value. If you buy when everyone else is selling, you will be able to get positions in strong companies for a lot less than you would pay when the market is running strong and everyone is buying.
10. Sell Your Losing Positions in Strong Markets
By the same token, if you wait to sell your losing positions until the market is particularly strong, you will minimize your losses. In some cases, you might even recover a profit.
Most investors have great difficulty mastering this concept. Once the stock starts rising, they tend to hold on to it under the assumption that will continue to do so. But in Buffets world, a losing position is a losing position, regardless of where the stock price is at.
11. Risk is Part of the Game – Get Used to It
“Risk comes from not knowing what you’re doing “ – Warren Buffet
Buffets way to wealth is actually a very risky one by conventional standards. He doesn’t invest heavily in safe assets like bonds and treasury bills. He invests primarily in stocks. But stocks are not nearly as risky as people tend think – as long as you know what you’re doing. And Buffet clearly does.
Buffet is able to eliminate most of the risk associated with stocks, by buying them cheaply enough that the speculation – and high prices – are completely squeezed out. Most of the positions that Buffet takes have nowhere to go but up. That is the result of buying after everyone else has sold out their positions.
In Buffets world, you would be buying heavily after a market crash, and keeping your powder dry when a bull market has been around for a few years.
12. Pay Close Attention to Management
“When a management with a reputation of brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.“ – Warren Buffet
While many investment analysts tend to focus on a company’s numbers, market position, specific assets, and even public sentiment, Buffett looks more closely at management. Every one of those tangible metrics can change in the future, substantially weakening a company. But the caliber of management represents the future of the business. With the right people at the helm, the business will grow and prosper no matter what challenges it may face.
13. Stick With What You Know
Just as Buffett avoids fads, he also tends to stick with what he knows when it comes to making investment decisions. In Buffett’s world, you have no business putting money into companies and industries that you know nothing about. Buffett’s billions came from the fact that he invested in businesses that he knew well.
The businesses that he does buy into also tend to be more basic in concept. As we saw in an earlier specific example, Buffett avoids buying into social media companies, since they are virtually new business concepts and not readily measurable. He favors easy to understand concepts like Coca-Cola and insurance.
14. Keep It Simple
“Derivatives are financial weapons of mass destruction. “ – Warren Buffet
There are a small number of investors on Wall Street who are making a lot of money in exotic investments, such as derivatives. Buffett avoids all such investment schemes, preferring to keep his investments basic. It once again gets back to the concept of investing in what it is that you know and understand.
15. Keep a Low Profile
Just as Warren Buffett lifestyle is incredibly simple considering his stature in the world, he also does his best to avoid the spotlight.
Sure, he’s a regular in giving an opinion on economic and public policy, but he avoids the outrageous behavior that has become symptomatic of the ultra-successful. But the success that he has is determined by the success of his business, rather than on his participation in out-of-the-box activities, or inflammatory public comments, designed mostly to draw attention.
We can probably guess that this low-profile existence makes it easier to focus on Buffett’s business at hand. After all, if you’re running around acting wild and making divisive comments, you won’t need to be spending a lot of time on rear-guard strategies to cover your tracks.
Even if you are not into investing, you can take all of these lessons from Warren Buffett’s life and apply them to your life and business, and with positive results.
“When a management with a reputation of brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.“
While Mr Buffett places great emphasis on the quality of management, his quote above says that no matter how good the management, they won’t change the underlying economics of a business.
‘With the right people at the helm, the business will grow and prosper no matter what challenges it may face’, is incorrect if the underlying economics of the business are poor.
To paraphrase WB – if you want to make a silk purse, always start with silk.
Great post…invaluable tips for any investor (beginner, intermediate or advance). Thanks for sharing. AFFJ
So few people can beat the market. And no one can beat the market consistently. I would much rather use the ‘set it and forget it’ portfolio management style and then focus my time on making new money to invest. I’ve seen people try to day trade. It’s really not as cool as it looks in movies. I had an old boss do it and although he always flashed a lot of cash around, he never built wealth. Perhaps day traders aren’t patient enough to build up wealth like the more passive investors.
Warren B is the man. Great advice!
I agree wholeheartedly with these points and highly respect Warren Buffet.
One thing you have to get used to, though, is this. You will miss a lot of great opportunities. I even stuck my neck out and wrote a post when Facebook went public about why I would not be buying any of the stock. Well, look at what I lost! And, perhaps how foolish I may have looked.
However, at that time there was no assurance that they had any idea how to turn a profit. In the end (at least so far) they have managed to do well by selling advertising (about 90% of their income I believe). People will remember this success while they forget the many disasters.
But even if some people do well sometimes, by investing based on speculation they are much more likely to have failures than loses. Los Vegas, anyone? And what Warren Buffet shows is that in the end it makes more cents to bet on things you understand and are reasonably certain will be profitable.
Warren Buffet makes a lot of money but he enjoys the work for the work and not for the money. The money is a benefit of his hard work, dedication, and commitment to the investment rules he put in place. His laid back lifestyle is a breath of fresh air in this financial, money driven world.
I so love the Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.“ . If we always put that in our mind that rule number 1, then it’s not possible that we will achieve a financial independence someday.
Warren Buffett is THE MAN. PERIOD.
Everyone can say what they want…..say that “buy and hold” doesn’t work, and try all type of fancy investments. But at the end of the day…results speak volumes.
I have lots of friends who mock my investment strategy and who buy stocks based on tips from a friend of a friend. At the end of the day – they end up behind because just like you mentioned “The reason why most investors fail to follow Buffett’s advice in this regard is because it requires a lot more work”
And that right there is the bottom line honest truth. I’ve done the research on companies, and it requires you to put in some time looking at countless numbers, ratios, reading reports, finding out who management is, etc…
But at the end of the day – it’s YOUR MONEY, and just like having kids, no one cares more about them than you do. So if you don’t take the time to understand what you’re doing with your money, you have no one to blame when you lose money in a bad investment because you followed a “hot tip”
Great compilation of Warren Buffett advice, Jeff. All of the teaching points above are outlined in detail in Benjamin Graham’s, “The Intelligent Investor.” After all, he was one of Dr. Graham’s students, and according to the Warren Buffett the only one who received an A in his class.
Awesome post. If there’s one investor any early investors want to emulate, it is Warren Buffet. Chock full of wisdom.
Great article and always wonderful wisdom from Warren Buffet. Love his quote about risk – “Risk comes from not knowing what you are doing” In the investment world many would have been well advised to take this on board!
Learned so much from this article! It is easy to understand and great advice that can be practiced by the average person. I especially like that he lives in the same house that he bought in 1957…. that alone speaks volumes!! I also love (and will be making a sign of to hang on my studio wall) “Someone is sitting in the shade today because someone planted a tree a long time ago.” For those of you who are parents, I think this will resonate in your soul. For those who aren’t, it still bears true. Thank you for writing this!