Warren Buffett’s investment advice is timeless. I have lost track of the number of investing mistakes I have made over the years, but almost all of them fall into one of the 10 buckets of investment tips given by Warren Buffett below. By keeping Buffett’s investment advice in mind, investors can sidestep some of the common traps that damage returns and jeopardize financial goals.
1. Invest In What You Know And Nothing More
One of the easiest ways to make a mistake is getting involved in investments that are overly complex. Many of us have spent our entire careers working in no more than a handful of different industries. We probably have a reasonably strong grasp on how these particular markets work and who the best companies are in the field. However, the majority of publicly-traded companies participate in industries we have little to no direct experience in. Thus, it’s best to leave them alone and stick with what you know instead.
2. Never Compromise On Business Quality
While saying “no” to complicated businesses and industries is fairly straightforward, identifying high quality businesses is much more challenging. Warren Buffett’s investment philosophy has evolved over the last 50 years to focus almost exclusively on buying high quality companies with promising long-term opportunities for continued growth.
3. When You Buy A Stock, Plan To Hold It Forever
Once a high quality business has been purchased at a reasonable price, how long should it be held?
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffett.
Quality businesses earn high returns and increase in value over time. Just like Warren Buffett said, time is the friend of the wonderful business. Fundamentals can take years to impact a stock’s price, and only patient investors are rewarded.
4. Diversification Can Be Dangerous
Individual investors gain most of the benefits of diversification when they own between 20 and 40 stocks across a number of different industries. However, many mutual funds own hundreds of stocks in a portfolio. Warren Buffett is the exact opposite. Back in 1960, Buffett’s largest position was a whopping 35% of his entire portfolio! Simply put, Warren Buffett invests with conviction behind his best ideas and realizes that the market rarely offers up great companies at reasonable prices.
5. Most News Is Noise, Not News
There is no shortage of financial news and headlines each day. The 80-20 rule claims that around 80% of outcomes can be attributed to 20% of the causes for an event. Most of the news headlines and conversations on TV are there to generate buzz and trigger our emotions to do something – anything! As investors, we need to ask ourselves if a news item truly impacts our company’s long-term earnings power. If the answer is no, we should probably do the opposite of whatever the market is doing.
6. Investing Isn’t Rocket Science, But There Is No “Easy Button”
Perhaps one of the greatest misconceptions about investing is that only sophisticated people can successfully pick stocks. However, raw intelligence is arguably one of the least predictive factors of investment success. It doesn’t take a genius to follow after Warren Buffett’s investment philosophy, but it is remarkably difficult for anyone to consistently beat the market and sidestep behavioral mistakes.
7. Know The Difference Between Price And Value
Stock prices are pushed at us nonstop. For some reason, investors love to fixate on ticker quotes running across the screen. However, stock prices are inherently more volatile than underlying business fundamentals (in most cases). As long-term investors, we need to heed Warren Buffett’s investment advice to buy quality when it is marked down in price.
While there is always some debate surrounding a company’s future earnings stream, the margin of disagreement is usually far lower than the stock’s price volatility. Investors need to distinguish between price and value, concentrating their efforts on high quality companies trading at the most reasonable prices today.
8. The Best Moves Are Usually Boring
Investing in the stock market is not a path to get rich quickly. Investing is not meant to be exciting, and dividend growth investing in particular is a conservative strategy. Rather than try to find the next major winner in an emerging industry, it is often better to invest in companies that have already proven their worth. After all, the goal is to find quality businesses that will compound in value over the course of many years. If we get this right, our portfolio’s return will take care of itself.
9. Low-cost Index Funds Are Sensible For Almost Everyone
Did you know that most investors fail to beat the market – and often by a wide margin? We hurt our performance in many different ways – trying to time the market, taking excessive risks, trading on emotions, venturing outside our circle of competence, and more. Even worse, many actively managed investment funds charge excessive fees that eat away returns and dividend income.
Despite his status as arguably the most prolific stock picker of all-time, Warren Buffett advocates for passive index funds in his 2013 shareholder letter. Low-cost, passive indexing is a great strategy for many investors to consider. Most stock pickers fail to generate performance that justifies their higher fees.
10. Only Listen To Those You Know And Trust
Warren Buffett emphasizes the importance of only investing in trustworthy, competent management teams. Warren Buffett is very careful when it comes to selecting his business partners and managers. Their actions can make or break an investment for many years to come. While we lack the resources to really evaluate the character and skill of a public company’s CEO for investing purposes, we can certainly control who we listen to when it comes to selecting our investments and managing our portfolios.
The financial world is filled with many characters – good and bad. Unfortunately, a number of folks realize they can prey on investors’ unrealistic expectations and feelings of fear and greed to make a quick buck. None of these activities benefit individual investors, and self-proclaimed “experts” are generally no better than we are at predicting the future. They simply must play the role of Mr. Confident to benefit their own self-interests.
