The Best Investment Tips From Warren Buffet

June 12, 2023

Warren Buffet has two simple rules for investing. He says, "Rule No. 1: Never lose money. Rule 2: Don't forget rule No. 1." Buffet has followed these rules religiously by only investing in high-quality companies at the right price and selling his investments as soon as they became overvalued. This may sound simple, but practicing these two rules is the greatest challenge in investing.Mr. Buffet notes that the stock market is like a manic depressive. If you let it suck you into its greedy heights and unwarranted pessimism, you will lose money. Staying rational makes the difference. Below are five rules Warren Buffet has followed that have helped him make an $85 billion fortune.

Be In It For The Long Run

The quote 'my favorite holding period is forever' is often attributed to Mr. Buffet. He first said it in his 1998 shareholders' report, and it serves to illustrate one of his favorite investment maxims: 'be in it for the long run.' Highly influenced by the great value investor Benjamin Graham, Mr. Buffet believes to make real money in stocks, you shouldn't buy them with the intent on selling them. Instead, invest in companies you like and understand, especially when they are on the bargaining table. You 'like and understand' a company because it produces useful things or products to such a successful degree that it has strong and stable cash flow and is likely to grow for the foreseeable future. Most of these companies are considered 'Blue Chips' by seasoned investors.

Start As Soon As Possible

Warren Buffet became one of the world's most successful investors by investing with a long time horizon in view. From the start of his investment career, he understood that playing the long game was the key to success. Fads and market bubbles provide a false sense of wealth. Those caught up in them believe they have made money, many failing to realize money made in short-term market bubbles never lasts. To succeed, one must follow a disciplined investment strategy based on long-term results.

When it comes to employing a long-term strategy, it's crucial to start as soon as possible. Investors who succeed in the long run do so by routinely investing money towards their goals. Everyone has to start somewhere. Even if the amount you can invest now is very modest, the important thing is to start. $50 per month may be a good starting point for some investors. Over time, such investors can find ways to increase their monthly contributions, perhaps to $75, then $100, and up. The power of compound interest makes these early dollars worth more than later dollars in your long-term plan, so start now.

Knowledge Is A Great Investment

Mr. Buffet is a great advocate of continuous life-long learning. He scans the newspapers every morning and reads books prodigiously in his desire for knowledge. In one publicized encounter, he gave a budding entrepreneur several pieces of advice. The first piece was 'before you go to sleep each night, ask yourself: are you smarter, have you learned something new?' A staunch believer in knowledge being a great investment, Mr. Buffet believes learning is the single best investment of our time we can make. Success is a great teacher. But Mr. Buffet even goes so far to say failure is a teacher too: learn from it.

Be A Student Of Other Peoples Folly

Whatever mistakes an investor can make, you can be sure someone has made it before. Warren Buffet knows it's important to be a student of other peoples folly. After all, it's better to learn from other people mistakes than through experiencing those mistakes yourself. There's a reason they call learning from your own folly learning the hard way.

History is full of folly. The stock market crashed of 1929 and 1987 and the financial crisis of 2008 provide plenty of examples. In addition, Buffet notes the importance of learning from your own mistakes. Everybody makes them, and Buffet himself is not immune. But he learned from them, so he would not put good money after bad. He has even spoken about his greatest mistakes so other investors can learn from them.

"It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Buffet has told investors. This quote sums up his investing philosophy. Investment is about finding high-quality investments and buying them at the right price. It takes knowledge, skill, and practice to become a successful investor

Build Relationships Everywhere You Go

Here's a quote attributed to Mr. Buffet: 'It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.' One of the pillars of his investment philosophy is the importance of having honest, well-crafted relationships, in business as well as one's personal life. He often speaks to students who are regularly surprised by the range of his remarks. In addition to business and investment topics, he speaks persuasively on the need to focus on personal relationships. He often advises students and business people to build relationships everywhere they go, both professionally and personally.

Form Healthy Money Habits

Mr. Buffet is famous for having lived in the same tidy and modest home in Omaha, Nebraska for most of his life, despite having acquired enough wealth to live like the Vanderbilts. He clearly understands the importance of healthy money habits, and living below your means is the most paramount money habit you can develop. If you live beyond your means, you strip yourself of the ability to save and invest. This leaves you at net zero or, worse, in debt.

Debt is anathema to any investment portfolio. If you pay 15 percent interest on a credit card, you really can't realistically make a return on your investments that exceeds it. Debt keeps you poor. Part of Mr. Buffet's success is directly attributable to his discipline in wise spending and saving habits. When you form healthy money habits, save religiously, and avoid the temptation to overspend and acquire debt, you can invest successfully for the long-term. Also, as Warren Buffet's example shows, avoid the temptation to buy a more expensive house than you need.

Know When To Cut Your Losses

Even though his favorite holding period for investments is forever, he is not shy to nip losers in the bud. Another of his investment pillars is to know when to cut your losses, since no one, not even the Oracle of Omaha, has a perfectly functioning crystal ball. Mr. Buffet learned early on, even in his teenage years as an entrepreneur, to fold up in a losing situation. Mr. Buffet believes trying to shovel out of a hole sometimes only makes it deeper. Instead, he advises cutting losses to avoid further difficulty. He once said there are only two rules for investing. Rule One, don't lose money, and Rule Two, don't forget rule one.

Buy Low And Sell High

Amongst the many traits Warren Buffet is famous for is the ability to recognize value investments. In stocks, value investments are the shares selling below the intrinsic value of a company. As a result, the shares have room to move higher.

Choosing good values is important, but Buffet uses other key criteria as well. He invests only in high-quality companies. After all, a stock may be selling at below its value for a good reason. Value does not mean cheap. The stock of a high-quality company could be expensive on a per-share basis but still below the intrinsic value of the company.

By buying stocks when they are undervalued, you are buying them low. Of course, that's only half the battle. Once the stock rises, you have to decide when it's time to sell. Mr. Buffet watches his investments carefully. When a stock starts to become overvalued and the market grows frothy, it's time to remember the adage: buy low and sell high.

Highest Cost Doesn't Mean Higher Value

Mr. Buffet knows value when he sees it because he was highly influenced by the godfather of value investing, Benjamin Graham. Real value, he believes, consists in buying high-quality companies when they are at depressed prices relative to their intrinsic worth. He firmly believes highest cost doesn't mean higher value. Instead, Mr. Buffet searches for firms he believes are valuable, but not necessarily recognized as such at the time. This is opposite of the 'herd mentality' approach in which some investors think increasingly higher prices mean a stock is increasingly valuable. Often, the best opportunities to buy occur when most other investors are running scared because of a major market meltdown and there is 'blood in the streets.'

Be Humble

To many, this advice seems unexpected when it comes from a self-made billionaire; however, as Warren Buffet shows, humility is part of the formula for success. He is known for declaring that he would rather deal with someone who has a 130 IQ and thinks it's 125 than a person with a 180 IQ who thinks it's 200. The person with an inflated sense of their abilities can do enormous damage.

In investing, Buffet considers humility important when it comes to selecting stocks and other investment vehicles. Being humble means accepting that you don't know everything. No person can, and even Warren Buffet is no exception. Buffet has enjoyed long-term success because he limits his investments to what he understands. It's always better to realize when something is beyond your capabilities than to rush into something and get in over your head. This is true in life generally and particularly in investing.

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