If you are into investing, you must have heard of Warren Buffett. He is one of the most successful investors and has a net worth of over US $100 billion, which also makes him the world’s seventh-richest person as of April 2021.
Buffett’s investment track record is outstanding with compounded annual returns of a little over 20% over the last 55 years. In other words, if you had invested 10,000 US dollars in his investment firm Berkshire Hathaway in 1965 that 10,000 US dollars would today be worth over 280 million US dollars.
Over the years, a lot has been written about Buffett’s investing style by others. In fact, Buffett himself has eloquently penned down his thinking framework in his annual letters to Berkshire Hathaway’s shareholders. So, in this blog, we will put together the available information into 9 valuable investing lessons which can help us in becoming better investors.
1 : Risk Comes From Not Knowing What You Are Doing
Many new investors jump into stocks or crypto without understanding them. Buffett advises sticking to what you know, as he himself avoided tech stocks for years until he fully understood them, investing in Apple only in 2016.
“Never invest in a business you cannot understand,” Warren Buffett.
* Lesson : Invest in businesses you truly understand.
2 : System Overpowers the Smart
Buffett recommends index funds for most investors, as they ensure disciplined investing and remove emotional bias. This approach has helped Berkshire Hathaway become highly profitable.
“A low-cost index fund is the most sensible equity investment for the great majority of investors,” Warren Buffett.
* Lesson : Follow a structured investing system rather than relying solely on intelligence.
3 : Have An Owner`s Mindset
Stocks should be treated like businesses—analyze their profitability, competitive edge, and risks just like you would when buying a company. Berkshire follows this philosophy with long-term holdings in Coca-Cola and American Express.
“That whole idea that you own a business you know is vital to the investment process,” Warren Buffett.
* Lesson : Invest in businesses with a 10–20-year horizon.
4 : Be Fearful When Others Are Greedy, and Greedy When Others Are Fearful
Market cycles swing between greed and fear. Buffett capitalized on fear in 2008 by investing in blue-chip companies, earning billions.
“What investors need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals,” Warren Buffett.
* Lesson : Ignore market hype, focus on fundamentals, and seize opportunities when others panic.
5 : Save For a Golden Rainy Day
Buffett is famously frugal and holds cash when stocks are overvalued. Critics questioned his cash reserves in 2000 and 2008, but he used them wisely when markets crashed.
“Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When a downpour of that sort occurs. It is imperative that we rush outdoors carrying washtubs and not teaspoons,” Warren Buffett.
* Lesson : Save for downturns when great opportunities arise.
6 : Never Invest Just Because a Company Is Cheap
Buffett learned that buying undervalued companies doesn’t always lead to success. Berkshire Hathaway`s failing textile business showed that a weak business remains weak despite a low price.
“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Warren Buffett.
* Lesson : Prioritize quality businesses over cheap valuations.
7 : Time Is the Friend of the Wonderful Business
Buffett believes in long-term compounding. A business growing at 20% annually will surpass one growing at 10% within a few years. Most investors focus on short-term gains, missing compounding`s benefits.
“Time is the friend of the wonderful company, the enemy of the mediocre,” Warren Buffett.
* Lesson : Invest with a multi-decade perspective.
8 : Never Use Borrowed Money to Buy Stocks
Debt-fueled investing is dangerous—markets can wipe out a third of an asset`s value in months, as seen in Berkshire’s history. Buffett warns against risking financial security for speculative gains.
“It is insane to risk what you have and need in order to obtain what you don’t need,” Warren Buffett.
* Lesson : Never gamble with borrowed money.
9 : Keep It Simple
Buffett emphasizes simplicity in investing—buying stakes in businesses where the price paid is much lower than the value received. He advises sticking to investments that are easy to understand and avoiding complex or speculative assets like cryptocurrency, futures, and penny stocks.
“If you are uncomfortable with the asset class that you have picked, then chances are you will panic when others panic,” Warren Buffett.
* Lesson : If you`re uncomfortable with an investment, you`re more likely to panic when markets fluctuate.
Bottomline
Buffett’s lessons are no rocket science. Keep it simple, improve upon what you know, stay within your comfort zone and there are enough opportunities for one to thrive in investing.