Warren Buffett has accumulated a lifetime of knowledge about the stock market and what things an investor should (and should not) do to build their wealth. Having become one of the richest men on the planet, he’s also walked the walk. I think that makes him worth listening to, regardless of how much money I have to invest.
Here are just some of what I consider to be the Sage of Omaha’s most important lessons.
Know your business
“Never invest in a business you cannot understand“.
Warren Buffett is a fan of sticking to what you know. He only buys stakes in a business if he understands what it does and how it will continue to make money for him in the future.
The portfolio of stocks owned by his holding company Berkshire Hathaway bears this out. Buffett part-owns giants such as Coca-Cola, American Express and Apple.
Early in my investment journey, I found it remarkably easy to get involved in things I didn’t understand (or at least didn’t understand as well as other people). Even if I didn’t end up buying shares in these companies, I still wasted lots of time trying to figure out exactly how they would grow my capital.
These days, I do what Buffett does. Throw such stocks in the ‘too hard’ pile. Instead, I hold shares in businesses I can easily summarise, like food-on-the-go retailer Greggs, luxury fashion brand Burberry and drinks firm AG Barr.
Buy quality stocks
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
If understanding what a business does is vital, so too is knowing how much to pay for its shares. Warren Buffett’s original investment strategy was to buy seriously cheap stocks. Their quality didn’t matter so much if they were so lowly priced. As such, he was confident he could still make money. This focus later changed to buying stocks with strong competitive advantages (or economic moats).
By their very nature, such companies aren’t all that common and are usually more highly valued. So, having found a good thing, Buffett believes an active investor should bet big. If not, s/he may as well track the index.
Learning how to separate the wheat from the chaff takes time. What’s taken me longer however, is recognising that paying up can still work if a company can reinvest and compound earnings for years to come.
Stay the course
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
With news coming thick and fast every day, there’s a tendency to think that investors need to react to everything. Buffett disagrees. He thinks that inaction is key to growing wealth. This is why he says his favourite holding period is ‘forever’.
While we shouldn’t take that literally (he still sells), Buffett’s record bears out this ‘buy and hold’ approach. He first began investing in Coca-Cola back in the late 1980s and still holds the stock today.
Whether I can own stocks for as long as Buffett remains to be seen. However, adopting a ‘don’t touch!’ policy means I’ll definitely save on commission fees. Over time, costs like these actually have a huge impact on returns.