Warren Buffett is the most successful investor of our times with a net worth of over $100 billion which makes the world’s seventh richest person.
In this blog, I put together 9 valuable lessons compiled from the many books & articles written on Buffett in addition to the sage advice that Buffett & Charlie Munger have given over the years in the Berkshire Hathaway annual meetings and their letters to the shareholders.
1. RISK COMES FROM NOT KNOWING WHAT YOU ARE DOING
Warren Buffett has time and again advised investors to not chase everything that shines, and to only focus on the opportunities that one understands. For instance, Buffett himself did not understand how to value technology stocks for a prolonged period of time and stayed away investing in tech stock for many years.
2. SYSTEM OVERPOWERS SMART
Buffett advices retail everyday investors to use a low cost index fund for wealth accumulation. His endorsement of index funds is based on the fact that:
- Investing via index funds gives you the advantage of a system
- It allows for a disciplined investing cycle via SIPs
- It keeps emotions away from corrupting that investing framework
3. HAVE AN OWNER’S MINDSET
From Buffett’s perspective, buying a stock is nothing short of buying a business. And one should follow the same kind of rigorous analysis and due diligence as one would do when buying a business. Buffett displayed the same owner’s mindset in this investments in GEICO, Coca Cola, American Express and Wells Fargo amongst many more
4. BE FEARFUL WHEN OTHERS ARE GREEDY AND BE GREEDY WHEN OTHERS ARE FEARFUL
The stock markets work in cycles of greed and fear. When there is greed, people are ready to pay more than what a business is worth. But when fear sets in, then great businesses are available at huge discounts.
5. SAVE FOR A GOLDEN RAINY DAY
Buffett wrote in 2016: “Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When a downpour of that sort occurs, it’s imperative that we rush outdoors carrying washtubs and not teaspoons”
6. NEVER INVEST BECAUSE A COMPANY IS CHEAP
After some poor acquisitions and investments he made early on, Buffett came to realize that a cheap business may be cheap but may not be a profitable investment. In other words, Buffett found more comfort in buying a great company at a fair price rather than buying a fair company at a great price.
7. TIME IS THE FRIENDS OF THE WONDERFUL BUSINESS, THE ENEMY OF THE MEDIOCRE
Warren Buffett understood the importance of time in investing and has reaped the benefits of compounding. Infact, compounding is also visible in how his personal wealth has grown over the years with him making a lot more money in the last 10 years than what he made in his first 50 years
8. NEVER USE BORROWED MONEY TO BUY STOCKS
In the words of Buffett, when ordinary people borrow money to buy stocks, they’re putting their livelihoods in the hands of a market whose swings can be random and extremely violent, even when it comes to a reliable stock like Berkshire Hathaway. Buffett’s advice is to use only that money when investing in stocks, that you can afford to lose
9. KEEP IT SIMPLE
Warren Buffett himself follows a simple to understand investing framework, which can best be defined as buying stakes in a business where the price one pays is far lower than the value one derives. He continues to drive the point that investors should invest in simple and understandable instruments only and in a systematic manner