Warren Buffett’s Top 10 Investing Tips
Below is Warren Buffett’s top 10 nuggets focusing solely on his area of unquestioned expertise – investing, NOT trading:
1. The Snowball
Buffett’s definitive biography, “The Snowball,” is titled so because it sums up his life in two words. Over everything else, Buffett believes in the power of patiently compounding over time. In investing, that means starting as early as possible (he started as a pre-teen), avoiding short-term risks even if it means lower possible returns (rule No. 1: never lose money), and letting investing returns build upon itself.
2. The concept of a “moat”
Buffett looks for companies with moats, or sustainable competitive advantages. The strength of Coca-Cola’s moat (its brand) is why he believes a ham sandwich could run it. The stronger a company’s moat, the more likely it will be a leader for decades rather than years. For examples, see some of the other companies Berkshire Hathaway owns a significant stake in: Johnson & Johnson, GEICO, Procter & Gamble, and Wells Fargo.
3. “Leverage is the only way a smart guy can go broke.”
Buffett believes debt is dangerous. That’s why you can have banks rife with Harvard MBA’s (hello, Goldman Sachs and JPMorgan) that are always a few days away from bankruptcy via a crisis in confidence.
4. The concept of inner scorecard vs. outer scorecard
“If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?” Those who answer the latter have an inner scorecard. They’ll have the ability to be a true contrarian, ignoring the world’s judgment and focusing on long-term results.
5. “Intensity is the price of excellence”
When asked what the most important key to his success was, Buffett answered “Focus.” Microsoft founder Bill Gates answered the same way. Buffett reached his current heights not only because of his brilliant mind, but also because of a focus that has had him analyzing stocks for hours on end, just about every day, for decades.
6. A stock is the right to own a little piece of a business
Buffett’s mentor Benjamin Graham’s idea. We frequently divorce a stock from its underlying company, especially when Mr. Market is delivering up a volatile stock price. Remember, though, that in the long run, a stock is only as good as the company backing it up. Kind of like how a promise is only as good as the person making it.
7. Don’t fall into the false precision trap
“We like things that you don’t have to carry out to three decimal places. If you have to carry them out to three decimal places, they’re not good ideas.” It’s important to keep the big picture in mind. A 20-tab Excel model that calculates a company’s value on a discounted cash flow basis is useless unless you understand the business enough to feed in good assumptions. When Buffett made a killing on PetroChina earlier in the decade, the mispricing was so obvious that his only due diligence was reading its annual report. Not recommended for mere mortals, but you see his point.
8. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
Remembering the Buffett concept of an inner scorecard, and the Rudyard Kipling admonition to “keep your head when all about you are losing theirs,” can lead to outsize returns as Mr. Market sways back and forth.
9. Margin of safety
As with many of his most beloved tenets, Buffett got this one from his mentor, Benjamin Graham. A margin of safety simply means buying in at a price well below your best estimate for a stock’s intrinsic value. In other words, don’t just buy names like Visa and Johnson & Johnson because they are great companies with strong moats. Go the extra step, and only buy them when they are great companies selling for good to great prices.
10. “A ham sandwich could run Coca-Cola.”
Believe it or not, that’s a compliment to Coke. It speaks to why it’s Berkshire Hathaway’s biggest stock holding. As Peter Lynch put it, “Go for a business that any idiot can run — because sooner or later, any idiot probably is going to run it.”
Source: Motley Fool
Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.
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