10 lessons Warren Buffett can teach you about investing

November 23, 2020

Warren Buffett is an American investing icon. The CEO of Berkshire Hathaway, Buffett has a net worth of US$78.9 billion as of August 2020, making him the world’s seventh-wealthiest person.

Over the years, Buffett has lived by a certain set of values that he uses to invest. His approach to investing can be distilled through many of his famous quotes, so here are ten things he can teach us about investing.

1. “Risk comes from not knowing what you are doing”

It may sound obvious, but Buffett invests in companies and sectors he knows something about. For the most part, he’s kept out of the technology sector, saying “never invest in a business you cannot understand.”

If you’re unsure about how to invest, the key is to take professional advice. Even if you’ve had some success in the past, you may become overconfident and think that you can transfer this success to other sectors.

2. “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes”

It’s important to remember that ‘investing’ is not ‘trading’. Investing is about minimising risk to generate wealth over the long term, not to generate short-term profits.

As Buffett says: “Our favourite holding period is forever.”

When you invest you need to remember that it’s for the long term, and that patience is often rewarded.

3. “Today people who hold cash equivalents feel comfortable. They shouldn’t”

Buffett has a mixed relationship with holding cash. On one hand, he has been critical of investors who hold their money in cash, saying: “They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

However, at the end of March 2020, Buffett’s Berkshire Hathaway boasted a record $137 billion cash reserve.

“Those treasury bills are paying us virtually nothing,” he says. “They’re a terrible investment over time, but they are the one thing that when opportunity arises, [we can use] to pay for those opportunities. The rest of the world may have stopped.”

While cash may be a poor long-term investment, Buffett argues that having a rainy-day fund (an extreme one in his case!) is essential, particularly in a crisis.

“We really want to be prepared for anything,” he adds. “We never want to be dependent, not only on the kindness of strangers, but the kindness of friends.”

4. “Predicting rain doesn’t count, building the ark does”

When the market is rising, it’s easy to look like an investing genius. However, it’s only during periods of volatility that you see who has a good long-term strategy.

Market turbulence will happen. As Buffett says: “It’s not an ‘if’ but a ‘when’”. So, you need to be ready for them. Working with a financial planner can ensure that you’re ready and prepared for any market downturn.

Buffett adds: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

5. “The most important investment you can make is in yourself”

Much of Buffett’s workday consists of him sitting in his office and reading. He says that much of his success is due to his relentless pursuit of knowledge: “One can best prepare themselves for the economic future by investing in your own education. If you study hard and learn at a young age, you will be in the best circumstances to secure your future.”

He encourages you to ‘read 500 pages every day’, adding: “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

6. “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right”

According to Buffett, one of the worst mistakes that you can make is to pay too much attention to commentators in the media, political drama, or market rumours.

He says: “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie [Munger, the vice-president of Berkshire Hathaway] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

7. “What we learn from history is that people don’t learn from history”

One of the worst things you can hear about an investment opportunity is that “this time it’s different.”

If you hear that, it’s likely that an investment bears the same hallmarks of a previous bubble or fad.

8. “I believe in giving my kids enough so they can do anything, but not so much that they can do nothing”

Buffett is famously planning to give away 99% of his wealth to charity. While his wife and children will still end up inheriting significant wealth, it won’t be quite as much as you might expect.

9. “Bitcoin has no unique value at all”

Buffett generally advises against investing in anything that isn’t a productive asset. He believes you should invest in companies and assets that produce value – and he thinks that Bitcoin is even worse than most other types of assets in that category.

“You’re just hoping the next guy pays more,” he says. “And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more. You aren’t investing when you do that, you’re speculating.

“Stay away from it. It’s a mirage, basically…The idea that it has some huge intrinsic value is a joke in my view.”

10. “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1”

This is Buffett’s golden rule on investment (although it’s worth noting that he has lost money over the years!)

What he means is that it’s vitally important that you keep capital preservation at the top of your priority list when deciding how to invest your money.

Get in touch

Going back to quote number one, ‘risk comes from not knowing what you’re doing’. As financial planners, our job is to help you to achieve your life goals – and putting a financial plan in place is one way to ensure this happens. To find out how we can help you, email info@depledgeswm.com or call (0161) 8080200.

Please note

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.