Warren Buffett is incredibly intelligent with a far better investment record (and, coincidentally, a lot more money, too) so I’m not trying to say that I know better than Buffett when it comes to investing. That would be silly. But, there is a large body of material out there in the form of interviews, his own articles, as well as his shareholder letters, and all of that has to be made sense of.
Let’s start with the major pieces of advice that you should be taking from Warren Buffett. Buffett came from the Benjamin Graham school of investing and even today embraces most of its philosophy. Graham taught investors for years, for example, that a stock is just a fractional piece of ownership in a business. Its value is derived in large part from that business so a huge driving factor in earned capital gains when investing in stocks is tied to the performance of the underlying business. Warren Buffett still echoes that same principle. In his words:
“Without passion there is no genius.” -Theodor Mommsen
For superior results, it’s absolutely essential to invest with superior managers.
“If a business does well, the stock eventually follows.”
This also implies that a stock will fluctuate around it’s intrinsic value, the business value that the stock represents. When taking the two investment principles together, it’s pretty clear that volatility should be seen as a gift, something to take advantage of. This is exactly what Benjamin Graham’s Mr. Market analogy highlights, an analogy Buffet has used many times in the past.
You can’t take the same actions as everyone else and expect to outperform.
Warren Buffett’s suggestion that you stay within your circle of competence is great. Having well defined boarders is really valuable when it comes to investing and will ultimately lead to better returns. Sticking to what you know means making fewer costly mistakes.
What distinguish the best investor is their understanding that investing is a popularity contest and that best opportunities come in buying what is unpopular.
Speaking of mistakes, my favourite piece of advice Warren Buffett ever gave was his suggestion to follow two simple rules: 1. don’t lose money, and 2. never forget rule number one. This piece of advice comes into my own investment strategy in a very powerful way, which I’ll talk about more in a bit.
No single investor has a monopoly on investment wisdom, as Buffett himself admits.
These are just a few nuggets of gold from Warren Buffett, and all are consistent with the principles that Benjamin Graham originally taught decades earlier.