Over the years, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have issued thousands of hours of advice for investors on how to be better at investing and not fritter away money in the stock market.
In 2008 at the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting of shareholders, one investor asked the duo for their advice on how to move away from the crowd-like mentality that affects so many market participants around the world.
A changing view
Buffett started answering by saying that his perspective of the investment world changed entirely around the age of 19. It was at this age when he first read Benjamin Graham's landmark book, "The Intelligent Investor."
Before this, Buffett said that he had been investing for around nine years, without a proper strategy. "I wandered around with technical analysis and doing all kinds of things," he told the audience. However, after the Oracle of Omaha discovered Graham's book, everything changed.
He went on to state that if "you absorb the lessons of 'The Intelligent Investor'" then "you will not behave like a lemming and you may do very well compared to the lemmings."
If you follow Graham's advice, Buffett continued, it is difficult to get a bad result in investing.
He went on to add that there are three big lessons in the book, which relate to investors' attitude towards the market generally. Readers should pay particular attention to this advice, Buffett declared:
"And there's three big lessons in there which relate to your attitude towards stocks generally, which is that you think of them as parts of a business; and your attitude toward the market, which is that you use it to serve you and not to instruct you; and then the idea of a margin of safety, of always leaving some extra room and things."
He went on to add:
"But the people in this room, I think, have learned that important first lesson. I mean, I think most people that own Berkshire do not see themselves as owning something with a little ticker symbol or something that may have a favorable or unfavorable earnings surprise or something of the sort, but they'd rather think of themselves as owning a group of those businesses that are out there in the other room. And that's the way to look at stocks. You'll never be a lemming if you do that."
It's not hard
People often try to make investing harder than it needs to be.
Buffett explained in 2008 that to be a successful investor, you don't need to be one of the most intelligent people in the country, and you don't need to have powerful connections. All you need to do is understand the basic relationship between stock prices and the underlying businesses that they represent.
Once you understand this vital connection and what it means, you can then build an investment strategy around it.
This is the hard part. Nevertheless, when you understand that a stock is not a gambling chip but a piece of an underlying business, it is easier to construct an investment strategy based on the pros and cons of that business rather than the pros and cons of the stock. You don't have to worry about macroeconomic developments or market movements. All you need to do is concentrate on the underlying fundamentals of a business.
From this, understanding why it is essential to take a long-term view of any investment comes naturally.
What's amazing is that Buffett and Munger have been giving this advice for the past four or five decades. Yet so few investors still treat stocks as an ownership interest in a business rather than a gambling chip. That's why this advice is still just as relevant today as it was in 2008.
Disclosure: The author owns shares in Berkshire Hathaway.
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