Warren Buffet's Wisdom Snippets

June 16, 2024

Words of wisdom from the most successful investor of our time.

Warren Buffett is widely considered to be the most successful investor of all time. During the 54 years that he has overseen Berkshire Hathaway, Buffett has generated a 20.5% annualized return for his fellow shareholders. How has he managed to amass such a fortune from his investments? Here are some of his golden nuggets for long-term success in the stock market:


1. Get out of cash and into assets 
The problem with cash is that its not producing anything, and via inflation, it is sure to devalue over time. Of course, we need to have cash to pay for our living expenses, but any excess cash is losing its value every day. Put your cash to work: Invest.


2. Never invest in a business you cannot understand. 
Dont get involved in overly complex investments unless you have the insight and time required to understand it in detail. Buffet calls it the circle of competence. Its not about how large your circle is - you dont have to be an expert on everything. Instead, its about knowing the perimeter of that circle and staying inside of it. Im no genius, but Im smart in spots, and Ill operate around those spots.


3. You want to be as comfortable with accounting as you are with the English language. 
Accounting is a pivotal skill in investing. If I am able to understand what Im seeing on the pieces of paper, it tells me everything I need to know about the business. If we cannot analyse the financials, we cannot make informed investment decisions.


4.  Price is what you pay. Value is what you get. 
Stock prices are inherently more volatile than underlying business fundamentals. Stock prices will swing with investor emotions, but that doesnt mean a companys future stream of cash flow has changed. Its better to buy a wonderful company at a fair price than a fair company at a wonderful price.


5. If you dont feel comfortable owning a stock for 10 years, you shouldnt own it for 10 minutes. 
If you've done your research properly & the business' fundamentals remain intact, the best time to sell, is never. As Buffet famously said: My favourite holding period is forever. Buffet will only sell a stock if the fundamental metrics break down or if the capital is required for a faster-growing opportunity.


6. Diversification is a protection against ignorance 
Diversification is playing it safe. Of course, this is a two-edged sword: Too little diversification can lead to excessive risk, but over-diversification can limit growth potential. Once youve done your research, and your conviction is high, buy more of the stock. If I know the facts of something, and it goes down, I buy more of it


7. There is so much chatter about markets 
Most news is noise, not news. 90% of the headlines you read regarding a particular stock are meaningless and will have no impact on the stock's long-term growth. We must learn to ignore the noise and focus on the data.


8. You dont need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. 
Investing isnt rocket science, but there is no easy button Many of the most successful investors of all time have been quoted saying that you do not require a degree to outperform the market. You just need a system which fundamentally analyses whether a company is a long-term winner or not.


9. Beware the investment activity that produces applause the great moves are usually greeted by yawns.
The best moves are usually boring. The stock market is not the place to get rich quick. If you want to get mega-rich slowly, the stock market is your best friend. The goal is to find quality businesses that will compound in value over many years. If we get this right, our portfolios return will take care of itself. Boring can be beautiful.


10. My advice couldnt be simpler: Put 10% in short-term government bonds and 90% in low-cost index funds. 
This one is for the individuals who arent investors by heart or profession. Did you know that most investors, especially retail investors, fail to beat the market and often by a wide margin? Index funds, like Satrix40, are often the most sensible investment. The great advantage of Index funds is that they avoid the mistakes that we make so often: trying to time the market, taking excessive risks, trading on emotions, and venturing outside our circle of competence. With index funds, you'll see more success with less stress.

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