Warren Buffett is without a doubt among the most successful investors of all time. He is also an exceptionally wise and experienced teacher and every investor can learn from him, regardless of their time and skill level.
Buffett has made many timeless quotes specifically about investing, which can be life-changing investment advice for most investors. Here are some of the best investing tips from Warren Buffett that can have a great impact on the way you invest.
“Risk comes from not knowing what you are doing.”
Only invest in things you understand
Nowadays, many people aren’t even exactly sure about which asset or company they’ve invested in. Maybe because they’ve just got an encouraging stock tip from a close friend or due to the fact that all the media and everyone else are constantly spreading out optimism about a certain company and the currently great time to invest in.
The result from that is the fact that you may know the company that you’ve invested in and might have heard of its products and what it’s doing but that’s already where it ends.
Not thoroughly understanding the companies you own is arguably the biggest mistake that you can make as an investor since you first of all, completely rely your investment success on randomness instead of your competence and secondly because you most likely won’t have a clue on how to deal with your investment as soon as you are supposed to make a move.
As competent investors, we are supposed to estimate how a company is going to perform in the future and base our valuation and then our investment decision on that.
However, this can never happen in the first place if we don’t even understand how the company actually makes money, how the underlying business operates, and how the financials of the business look like.
Warren Buffett especially emphasizes only to invest within your ‘circle of competence’, which is a range of businesses that is particularly familiar to you and thus have a high probability to be understood.
In other words, you can’t estimate the future value of a company and how it’s going to perform if you don’t understand the business itself. Investing in things that you understand is a simple but very important rule. To define the things, which you understand, you can simply ask yourself what kind of products or services you are constantly confronted within your everyday life.
For instance, if you have been working within a specific industry for many years, you may be especially experienced within that area and with businesses relating to your work.
A person who has been working as an App developer for 5 years will clearly have an advantage in analyzing tech development companies over many other investors who don’t come up with that level of experience.
That being said, this doesn’t mean that you should never invest in businesses out of your circle of competence. The key is to expand that circle of things you understand continually throughout time. You should be at least aware that you will have to take the analysis process with more caution and spend additional time to learn and understand the company and its industry.
Therefore, it would be necessary to at least have some kind of interest and willingness to learn more about how the business works.
“Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”
Invest in the Long Term instead of the Short Term
One of the core things that differentiates Warren Buffett from many other investors is that he doesn’t seek for short-term gains. In other words, he doesn’t care about the performance of his stocks over a week, month or even year but rather focuses on the long term performance of his investments.
There are several reasons why this type of thinking will lead to more success for investors. One of them is simply the fact that it is close to impossible to achieve consistent returns over the long term by trying to beating the market over short time periods.
You would rather base your investments on pure randomness and luck when you try to predict if your stocks are either going up or down within the coming week, month or year.
Buffett has his focus primarily on the quality of a business and not how it might perform in the short term. This investing philosophy has led Berkshire Hathaway and its owners to incredible returns for multiple decades.
Therefore, it may be very beneficial to you to always apply the same question every time when you analyze a stock. Would I be willing to own that stock for the very long term?
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Differentiate between Price and Value
When it comes to value investing, it is all about finding great businesses that are priced at a discount from their “true value” also called the intrinsic value. Value investors like Warren Buffett imply the understanding that all businesses have a specific fair value, which depends on the estimation of the investor.
In reality, the market doesn’t always offer companies for their intrinsic value. Sometimes, they are trading below their intrinsic value, sometimes above their value. This is the primary reason why value investing actually works.
It is up to the investor to find great companies that are undervalued at the same time to achieve constant and sustainable success in the long-term.
One way to look at this is to imagine the current market price of each stock as a book cover, whereas the content of the book stands for the true qualities and value of the stock.
What you will see immediately is the book cover but to truly find out how much the book is really worth, you will always need to analyze its content. And oftentimes, the cover of a book won’t tell you anything about how great the book really is.
“Price is what you pay. Value is what you get.”
Investing isn’t as complicated as it may look
In the investing game, it’s not necessarily about being more intelligent than others. In a lot of times, people try to overcomplicate things, which makes investing look harder than it really is.
For instance, if you are just looking for a way to invest your wealth passively in order to grow it massively over the long run, you won’t even need to spend any considerable amount of time with analyzing companies. You could just invest in an index fund or ETF and let the market do the rest.
There would be no need to waste your time on economic predictions, analyst estimates, or technical indicators. There is a high chance that you won’t even be able to do any better in the long run by looking for greater returns in the short run.
In fact, most experts even fail at beating the market, despite the fact that they have access to much more time and resources than ordinary investors.
On the other side, if you are actually committed to spending the time and effort to learn more about investing from the greatest investors such as Warren Buffett, you might quickly find out that smart investing is much less complicated than what all the experts and professionals at Wall Street are teaching and applying.
Investing for most people is more about emotions than pure intelligence.
Most of the time it would be all about finding companies that you would be confident to own in the long run and buying them at a discount of their value.
That being said, this doesn’t mean that it’s extremely easy to achieve long term success as an investor. Finding the right companies might be very time consuming and frustrating, especially at times where there might not be a lot of great bargains to find.
For that reason, you would most likely need some sort of passion and interest in investing and finance in general to be successful as an investor in the long-run.
While constant learning is necessary, at least it is much easier than most people think. You will still need a lot of time and patience to find truly worth investments. However, overcomplicating things is mostly not the right way to go.
“There seems to be some perverse human characteristic that likes to make easy things difficult.”
The 1st Thing Necessary for Success
Probably the best investment that you simply can not beat is investing in yourself. In the end, you are more or less the most important source of your wealth. Building and managing wealth all comes down to your capability of knowledge and understanding.
That’s also why pretty much all successful people constantly commit their time to learn through books, courses, seminars, etc. Warren Buffett is said to spend 80% of his time on a day with reading.
As a result, investing in yourself may be the best investment that you can make right now and you are likely going to thank yourself in the future for that investment. Therefore, you should take the time and figure out how you are going to invest in yourself.
This could happen through plain knowledge out of an educational book about the topic you wish to become better at, or through seminars and events that you can attend, which might give you an enhanced learning experience. Nowadays, there are plenty of options out there, and it is up to you which type of method you choose.
Either way, it should be noted that successful investing does require a good amount of understanding about the topic paired with a healthy and rational investing mindset. All these necessary factors can only be acquired by investing in yourself.
“Ultimately, there’s one investment that supersedes all others: Invest in yourself”