Editor’s note: This article was first published in May 2011. The statement that Buffett doesn’t like tech companies, and the linked article on his portfolio, reflect that year; Berkshire Hathaway later invested in IBM in 2011 and became one of Apple’s largest shareholders from 2016.
Here is a summary of the investment advice Warren Buffett has given us over the years. None of it is new, and many of us already apply some of it without even realizing, but it never hurts to know how the greatest investor of our time thinks.
1. Don’t think of yourself as a guru.
Warren Buffett warns that there are two kinds of people who lose money investing in the stock market: those who know nothing and those who know everything. Don’t try to predict the market, political changes or interest rates. Focus on the present.
Note: I’ve put this “advice” as number one because it is probably the only one I disagree with. We need to keep in mind that Buffett is strictly a long-term investor who can afford to keep huge amounts of money tied up in a company for decades. We, on the other hand, should try to predict how the market will move and stay very alert to any changes that could hurt the economy.
2. Only invest in businesses you understand.
This is the best advice anyone can give, to an investor and to an entrepreneur alike. If you don’t understand the type of business, stay out. If you don’t know how to play a game, don’t play. If you can’t swim, don’t jump into a pool. It is said that before making his first investment as a boy, Buffett spent months studying everything about the company he wanted to invest in before taking the plunge.
3. Be patient.
This is the greatest virtue an investor can have, whether buying, holding or selling. Buffett likes to buy cheap, so he sometimes waits weeks or months for a company to go through one of those periods when its share price drops, so that he can buy in at a good price.
Once you are a shareholder in the company, don’t let nerves and fear play tricks on you if the stock doesn’t perform as you expected. Be patient and wait for the price to recover. Remember the three strategies you can follow when a stock starts to fall.
4. Always think long term.
Personally, I don’t identify with this point, because when I see profits, I take them. For Buffett, investing in the stock market is very different. He doesn’t speculate on share prices. As he has put it himself, when he buys a stock, he buys it forever.
5. Diversify only as much as you need to.
Diversifying too much is a clear sign that you don’t know what you are doing. If you have invested in six companies you expect to be profitable, why look for a seventh instead of putting more capital into one of those six? You can see Warren Buffett’s investment portfolio here.
6. When you invest, don’t buy stocks, buy businesses.
Some investors are swayed by charts, others by analysts’ buy recommendations for companies that are supposedly going to be industry leaders, and others by companies that are simply fashionable. Warren Buffett invests in companies with a detailed, clear business plan and market strategy. He invests in companies that were around before the “fad” and will still be around when the bubbles burst.
That is why his favorite stock is Coca-Cola: 150 years from now, Coca-Cola will probably still be the best-selling soft drink, even if it perhaps comes in pills instead of liquid form. Either way, Buffett trusts that the company will keep adapting to the market, whatever happens.
See also: Safe investing with term deposits and savings accounts
7. Know how to say no.
When you start investing in the stock market, you end up on a list of potential buyers of shares and investment funds, so day in, day out you get calls from “sales brokers” who, like someone selling phone contracts or insurance, will dress up a product to get you to invest in it. You need to know how to say no and not let yourself be persuaded without first thoroughly studying everything you need to.
My personal advice is this: anything that is really good doesn’t need to be sold to you; you go looking for it yourself. Another clear example of knowing how to say no is the friendship between Bill Gates and Buffett. Gates has billions invested in Buffett’s company, while Buffett hasn’t invested a single dollar in Microsoft (Buffett doesn’t like tech companies).
8. Be prepared to take risks.
Warren Buffett advises against investing in the stock market for anyone for whom a 50% drop in share prices would cause financial and emotional “havoc”. In the stock market you can win and you can lose, so, just like a football player, you need to be prepared for both outcomes. Otherwise, you’d better not play.
Remember that you should only invest money in the stock market that you won’t need for the next few years.
Further reading
- Serious mistakes stock market investors make
- How you can go broke investing in the stock market
- Warren Buffett speech (video)
- Warren Buffett quotes
Featured image: William Creswell, CC BY 2.0, via Flickr.
