Warren Buffett is the world’s most famous investor. He bought his first stock when he was just 11 years old and has been accumulating wealth ever since and is worth, well, who cares. He’s worth a lot of money. Enough to consistently put him in the top 5 wealthiest people in the world. It’s worth listening to investment advice from Warren Buffett.
He’s famous for good reason. His track record is unbelievable with a yearly compounded return of about 17%! For comparison, the 90 year average for the S&P is 9.8%. A 7% difference may not sound like much until you compound it. It’s that compounding that has made many, many millionaires (and at least 7 billionaires) out of ordinary people who have invested with Buffett over the years.1
Since 1964 that’s a return of 2,472,627%! In other words, $10,000 invested in Warren’s company would now be worth $170 million. 2
His investment philosophy was highly influenced by famed value investor, Benjamin Graham. Graham authored the book, “The Intelligent Investor,” which is a must-read for any investor or business person. Graham is considered to have pioneered value investing and Buffett calls the book “by far the best book on investing ever written.”
In 1956 Buffett created what would become Berkshire Hathaway, a holding company for his and his investors’ assets. He has been the chairman and largest shareholder since 1970.
Buffett prefers to invest in companies or buy them outright and let the managers run them as they see fit. In return, the businesses get access to the resources of Berkshire Hathaway so they can focus on the long-term strategy and vision and not be forced to make short-term decisions. This gives his companies a big advantage over most public companies who have to make trade-offs to hit their quarterly earnings, essentially trading long-term profits for short-term gains.
He started investing early and in high school bought a 40-acre farm and by the time he graduated from college had saved $105,000 (in today’s dollars).
The way Buffett looks at stocks is a lot different from the average person. He doesn’t look at them as pieces of paper or buying stocks as “playing the stock market.” He looks at it as buying a piece of a real business. That helps to explain the long-term view he takes that a true owner would have, rather than a trader or speculator.
“The basic ideas of investing are to look at stocks as businesses, use the market’s fluctuations to your advantage, and seek a margin of safety. That’s what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing.”3
Benjamin Graham may have pioneered value investing, but Buffett popularized it. He invested in undervalued, well-performing companies and has held them for decades. Companies like Coca-Cola, Wells Fargo, and Wal-Mart. He has held through the ups and downs. People drink Coke and shop at Wal-Mart even during a recession. Maybe even more so.
Value investing looks for well-run companies that are trading at a discount. The market is driven by fear and greed so occasionally good companies get dragged down with the rest of the market. Just because the market crashed, doesn’t mean people will stop drinking Coke, although the stock may have tanked with the rest of the market. That creates value for the investor to buy at a discount.
I’m not a big proponent of stock picking, but if you like that and have a large enough portfolio for it to make sense, here‘s a list of what to look for when picking stocks using value investing, according to Warren.
Having following Buffett for 20 years and read all his annual reports since the beginning of Berkshire, I’ve got a few favorite lessons from the investment master. Here’s a list of some of the best investment advice from Warren Buffett:
Invest in yourself
Buffett is an advocate for learning all you can, especially about investing. He has said that by the time he was 10 he had read all the books on investing in the Omaha public library at least once! Time spent learning about investing is time well spent.
It’s the simple things that made him wealthy. “There are no secrets in this business that only the priesthood knows. It’s all out there in black and white. It’s a simple business.”4 To be a successful investor, he said that you don’t need to do extraordinary things, but just the right things over time, which is to start early, continually add money to your investments in good companies or an index.
Rule #1: Never lose money. Rule #2: Don’t forget rule #2.
This rule has helped me curtail my often disregard for risk. The same disregard many entrepreneurs have since we’re more prone to be risk-takers than most. Maybe I’ve lost out on some great returns, but I’ve also lost out on big losses. I’ve had my share of losses in startups and it’s painful. If you take more risk, there’s more chance of reward, but it goes both ways. The tough thing about losing money in investments is that if it goes down 50%, then it has to go up by 100% to be back to where you started.
Invest in the index
He’s an advocate for index investing, saying that it’s very difficult to beat the market. He has for many years, but then again, you’re no Warren Buffett and neither am I. If you don’t have the expertise, time or interest to read annual reports all day like he does, you’ll be much better off investing in index funds.
He’s spoken against the efficient market hypothesis, which states that stocks always trade at their fair value, by saying that anyone who beats the market does so by pure chance. In 2007 he made a bet with several fund managers that they couldn’t be the market over time. By 2017, the index was beating every one of those hedge funds.
He believes in index investing so much that he instructed the trustee of his estate to invest 90% of his money into index funds. 5 For all investors, investing in a low-cost index fund makes sense practically all the time. 6
Buy and hold
Buffett has said that his favorite holding period is forever. If you don’t think the company is good enough to buy forever, then don’t buy at all. If the fundamentals change in a company, then by all means sell. Otherwise, buy at a good price and hang on to it.
Invest for dividends. Investing in great companies that pay consistent dividends is a great benefit because it shows the company is in great financial shape. The Dividend Aristocrats is a list of S&P 500 companies that have increased their dividend payouts for 25 consecutive years or more. This list over the past 10 years has had a little better return with a little less risk.7 If you like the idea of dividends, check out the list.
Don’t watch the market
Benjamin Graham said that “in the short run, the market is a voting machine but in the long run it is a weighing machine.” Meaning that the market volatility is partly driven by emotions of fear and greed, but in the long-run the true value comes out.
Buffett likes to say that stocks should only be reported once a year and that watching the daily stock price fluctuations isn’t useful for long-term investors. The true, long-term value of good companies doesn’t move around that much day-to-day and it’s nearly impossible to time the market, or in other words, buy at the bottom and sell at the top. That makes watching the market a waste of time.
So turn off CNBC and ignore the daily stock prices because it doesn’t matter. Buffet said of the financial industry that “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”
Value vs. price
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ 8 Price is what the market puts on it, while value is the subjective amount you get from it, which may be at some time in the future. That’s why entrepreneurs should not assume that since they spent $10,000 building their product or $500,000 building their company, that it’s worth that much. It cost that much, but the value is based on the earnings it generates.
Cash is King. Debt-free is best.
“We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”9 Having not debt and cash in the bank is good policy for companies of any size and for families. When you’re in that position, you’re not at the mercy of anyone. Creditors can’t come after you if you miss a payment. If the economy goes south or you lose your job or your company falls on hard times, it’s so much easier to sleep at night when you’re prepared.