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10 Things I’ve Learned From Warren Buffett

by John Schroeder

Warren Buffett is one of the most recognized and respected investors in the world. Often referred to as the “Oracle of Omaha”, Mr. Buffett is the primary shareholder in Berkshire Hathaway and is one of the most wealthiest people in the world. Most investors (including myself) have lots of respect for him and attempt to pattern their investment strategies towards his.

10 Things I’ve Learned From Warren Buffett

I have been a big fan of Warren Buffett for several years now and have recently taken a lot of his advice. Below is a list of 10 popular Buffett quotes and how they have impacted my investment strategies.

1 – “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

This is why Warren Buffett is one of the richest people in the world today. The lesson here is to avoid the hype and run away from the market when other investors are greedy. On the other hand, when investors become fearful, it is time to start investing again.

Every stock market bubble and subsequent recovery have proven this point. I fell for the internet bubble several years ago thinking the sky was the limit when it came to technology stocks. I lost thousands and thousands of dollars (as many others did) from believing the hype.

Investors who believe in Buffett’s advice actually do the opposite of what the majority of investors are doing. With so many media sources these days, following this rule is difficult and takes lots of patience.

2 – “Our favorite holding period is forever.”

There was a time, not to long ago, that I thought the best way to build wealth in the stock market was by flipping stocks. As an inpatient investor, I was too concerned with daily price fluctuations, trying to time the market. What I failed to realize is that it is virtually impossible to time the market when buying or selling stocks.

There are plenty of investors who make great returns with short term investment strategies like day trading. While this stock trading strategy works for some, it doesn’t for most of us. Unless you are a professional trader and have lots of experience in the market, there is little chance you will survive the market.

After many years of investing, I have now realized the best way to build wealth is to invest in companies for the long term. As Mr. Buffett points out, the best holding period is “forever”. As someone who now invests in dividend paying stocks, I couldn’t agree more.

3 – “Never Pay Retail”

When it comes to consumers, frugal living is in these days. Shoppers have become much more restrictive in their purchases and rarely pay retail anymore. It seems that everyone is looking for a good deal or clipping coupons to save money.

If you are not paying retail for food, clothes, and electronics – why would you overpay to own a stock? I have paid retail (or even above) for many stocks over the years and have lost plenty of money doing so. Take a lesson from Buffett and avoid paying too much to own a stock. Be patient and wait for a sale in the market. As long as prices fluctuate, there will always be great companies that can be snatched up on clearance.

4 – “Know When to Cut Your Losses”

This may be the hardest lesson for investors to follow through on. No shareholder wants to take a loss on a stock, especially one they selected. There is always this thought that a stock will eventually turn around. While there are plenty of good companies that do turn their business around, there are usually many more that do not.

More often than not, it benefits an investor to establish a threshold for when to cut their losses and act on it.

5 – “If a business does well, the stock eventually follows.”

Analysts and shareholders make investing much harder than it actually is. It seems so obvious that if a business is doing well, then the share price of the stock will eventually follow the same trend. Instead, we try to over analyze every detail to the point of absolute confusion.

Want to know what to invest in next? Do yourself a favor and look around at the companies that are doing the best business. Who is investing in advertising? What stores always seem to be packed with customers. If the company is public and there business is doing well, you can bet the stock will follow that same trend.

6 – “Wide diversification is only required when investors do not understand what they are doing.”

Most so-called financial analysts and experts tell you to diversify your portfolio. However, if you pay attention to what the market gives you and follow Buffett’s other lessons, then there really is no need to diversify.

While I don’t believe an investor should be over weighted in a particular sector or industry, I do not believe in building your own mutual fund either. I think the average investor could easily build a diversified portfolio of dividend paying stocks from 10 to 20 companies and no more. Anything over 20 stocks and you might was well buy an ETF or an index fund.

7 – “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

There is no investor out there looking to lose money in the market, so this quote may sound a little funny to most. However, it is important to remember why we invest in the market – to make money. If your investment goals are not to make money, then you may as well take your dollars to the casino and have a little fun.

What I have learned from this Buffett quote is to build an investment strategy that gives me the best chance to make money (not lose it). Instead of focusing on making short term gains that could be risky, I have decided to focus on long term growth through dividend stocks.

8 – “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

I personally don’t have the time to constantly follow the market and each investment that I have made. So, instead of creating more headache for myself, I now invest in companies that I have absolute confidence in. I no longer invest in the next high flying tech stock, instead opting to invest in dividend aristocrats. These blue chip companies have been around for a long time and are probably not going anywhere.

I have now taken the investment approach to only buy stocks that I can hold for several years instead of months. While there is no guarantee when it comes to a stock, I have found it much simpler to invest in well managed companies that pay dividends and will continue to in the future.

9 – “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

Worried investors look at a market decline as the end of the world, while patient investors use it to their advantage. As I mentioned earlier, it is critical to buy stocks on clearance instead of at retail. As the market fluctuates, confident investors use bearish trends to pick up some great discounts in the market.

Using this strategy is an excellent opportunity to build solid wealth.

10 – “Risk comes from not knowing what you’re doing.”

How often have you bought a stock and then couldn’t stop worrying about losing money on the purchase? As Buffett tells us, doing your homework will remove all risks from an investment. Sure, there are economic forces that we can’t control and can weigh down a stock. However, since we are taking a long term term approach to investing, there is plenty of time for the investment to come back and allows us to buy some more on clearance.

Final Thoughts

Warren Buffett has had a direct impact on my investment strategy over the past couple of years. As a young investor early on, I was too focused on the short term gains and failed to realize the true power of building wealth through dividend stocks. While there are no guarantees in the stock market, there are plenty of things an investor can do to minimize their risks. It seems that Mr. Buffett has figured most of them out.


Published or updated February 2, 2011.
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{ 4 comments… read them below or add one }

1 Donny Gamble

I never pay retail on anything I purchase because the retail price is always an over inflated number

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2 Eric

Awesome post! I went to the Berkshire meeting last year and plan to make the pilgrimage to Omaha again in May. Buffet is a big inspiration to my investing style.

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3 Natalie

This is a good article about Warren Buffet’s investing philosophy, and I understand why some folks would look to a successful person like Warren Buffet for stock investing inspiration, but I personally don’t think he gives the best retail stock investor advice.

Buffet invests differently than any retail stock market investor. Please correct me if I’m wrong here, but he invests directly in companies, privately negotiating the price he will pay for a share of stock which he pays directly to the company and he does not purchase shares on the open stock market. So his advice is not being applied to the “right” investment vehicle.

Stock market investors have to educate themselves on how to read what price is doing. Dividends should be secondary, as a stock paying a dividend can go down further than the dividend amount. Not good. And a stock without a dividend can gain much more than a solid dividend. So, what does one do? Investors need to understand more about how price moves. I believe it’s just part of being an investor.

These are my responses to Buffet’s rules:

1. If you’re investing in the stock market you should be in tune with what it is doing at all times. Understand how to read market direction.
2. Holding a stock forever will no longer work with stock investments. Just look at a monthly chart of $SPX from about 1997 to present.
3. Never buy a stock that’s not doing anything. Have criteria for picking stocks based on something other than you think it might be a bargain.
4. Yes.
5. This is not always true.
6. Neutral.
7. Yes.
8. I thought we were trying to make money on our investments?
9. Never try to catch a falling knife (or stock). Have a mechanism for determining a price reversal, not arbitrary price points.
10. YES.

Another consideration if you like Buffet is to buy Birkshire Hathaway Class A or B or invest in a mutual fund that is invested in the company.

Again, this is a good article even though I don’t agree with the total investing style. Thank you for writing it.

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4 Jacob @ My Personal Finance Journey

Nice article here! Thanks for submitting it to the Carnival of Passive Investing.

1) As far as the holding period of forever goes, I feel that this works well for people like Buffett who are investing more in the business than the stock.

2) We can definitely learn a lot from Buffett for our passive investing strategies because we need to remember to maintain our asset allocation targets during bad market times.

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