5 Lessons From Warren Buffett

Warren Buffett (Trades, Portfolio) is both one of the world’s greatest investors and a figurehead of the investing world. Not only has Buffett achieved exceptional returns for his investors and shareholders over the years, but his wisdom and teachings have helped educate thousands of other investment managers and individual investors over the past four decades.

The lessons Warren Buffett (Trades, Portfolio) preaches all have their roots in value investing, but over the years Buffett has developed his own style of value investing, building on the roots his former teacher, Benjamin Graham, laid down 80 years ago.

Unfortunately, with the entire investment world hanging on Warren Buffett (Trades, Portfolio)’s every word, it’s difficult to find an unbiased, uncomplicated break-down of his teachings.

There are thousands of books out there on Buffett and there are thousands (possibly even tens of thousands) of articles on Buffett, Buffett-style strategies and ‘how you can invest like Buffett.' With all this information it’s very easy to see how the average investor can become overwhelmed with Buffett data. So, in an attempt to try and simplify the process, I’ve gathered together five of what I believe are Warren Buffett (Trades, Portfolio)’s most informative pieces of advice, which can have the most impact on your investing strategy -- they certainly have had a significant impact on my investment process.

1. On the Art of Speculation

It’s well known that Warren Buffett (Trades, Portfolio) is a long-term buy and forget investor and a lot of his advice is focused on deterring speculation. None of his quotes are more relevant on this topic than the ‘Cinderella’ analogy.

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

Another Buffett quote breaks the above down into a more understandable format:

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well."

2. The Greatest Investment You Will Ever Make

Buffett famously spends most of his day reading, learning about new companies, ideas and keeping up to date with developments around the world. Over the years he’s built up a rich fountain of knowledge, which is his greatest asset. Educating yourself about the market, accounting and general developments in the financial world will always pay off in the long term, even if the benefits aren't immediately apparent:

“Imagine that you had a car and that was the only car you'd have for your entire lifetime. Of course, you'd care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body. Prepare them for life, care for them. You can enhance your mind over time. A person's main asset is themselves, so preserve and enhance yourself.”

Or to put it another way:

“Read 500 pages like this every day...That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.” -- Source

3. Don’t Lose Money

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."

I think this is one of the most important and misunderstood pieces of Warren Buffett (Trades, Portfolio)'s advice.

What Buffett is trying to say here is investors should only consider investments where the risk of permanent capital loss is nil. There’s always an element of risk buying stocks, but ensuring there’s zero chance of a 100% loss by buying those equities with cash-rich balance sheets and plenty of cash flow, you’ll significantly improve your chances of outperforming over the long term. What’s more, as I explored here (Buffett's First 2 Rules Can Make or Break Your Performance ), even a small total loss can be hugely detrimental to long-term returns thanks to the effects of compounding.

4. Doing Things Right

"You only have to do a very few things right in your life so long as you don't do too many things wrong."

Quote number four has a lot in common with number three. Investing is a marathon, not a sprint. Most highly experienced investors will tell you their greatest gains have come from only a few positions. Put simply, you only have to do a few things right in investing to generate substantial returns, as long as you don’t make any serious mistakes.

5. You Don’t Need to Be a Genius to Be a Successful Investor, Master the Basics and the Rest Will Fall Into Place:

"To invest successfully, you need not understand beta, efficient markets, modern
portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing
iew at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices." -- Source: Chairman's Letter, 1996

"You don't need to be a rocket scientist. Investing is not a game where the guy with
the 160 IQ beats the guy with 130 IQ."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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