Warren Buffett is likely the best-known, most successful investor in the world today. The philanthropist and CEO of Berkshire Hathaway has an estimated net worth of $158 billion and is known as the Oracle of Omaha for his ability to pick long-term investments. Hes also dedicated to sharing his wisdom with everyday investors, including beginners.
Here are Buffetts top three tips:
Principle No. 1: Invest Only in What You Understand
Buffett has famously advised, Never invest in a business you cannot understand.
In a letter to Berkshire Hathaways shareholders in 1996, Buffett explained the concept of a circle of competence: Basically, these are the fields that you truly understand and are knowledgeable enough to evaluate. You don’t have to be an expert on every company, or even many, Buffett said. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. For example, Buffett famously stayed out of tech stocks early on because he felt he couldnt truly evaluate the investment opportunities himself.
At a 2019 stockholders meeting, Buffett advised investors to try and learn as much as they can about as many businesses as possible and then figure out which ones they truly understand and have knowledge on. That, he said, would put them ahead of most other investors.
If youre an investor whod like to build your own portfolio, sticking to what you know is vital. Youll be able to evaluate each business for yourself and understand the true relevance of new developments over time. Meanwhile, if youre investing in something just because someone else says its a good idea, youre entirely dependent on their judgment, which may not be as sound as they claim or believe it is.
If you dont have the time or inclination to study individual businesses thoroughly enough to make these judgments for yourself, Buffett recommends investing in an S&P 500 index fund as the best option for most investors.
Principle No. 2: Avoid Unnecessary Activity
You dont get paid for activity, you only get paid for being right, Buffett said in 1998.
Especially as a beginning investor, youll likely get the urge to react to news about the market or your individual investments immediately. Its easy to panic when an earnings announcement sends the value of your equity down 5% or more in a day.
But Buffett preaches patience: If youve done your due diligence and youre investing only in stocks you have strong reason to believe will pay off in the long run, a little market noise along the way shouldnt scare you off.
Inactivity strikes us as intelligent behavior,” he said in his 1996 letter. If youre sure youre investing only in strong, well-managed businesses, then you need to trade only when those qualities arent true anymore.
Stocks and the market tend to grow in value over time. By trading too frequently, you may find yourself reinvesting in stocks at higher prices than you originally bought them atlosing out on gains, dividend payments, and any trading fees in the processor losing out on higher long-term profits.
Principle No. 3: Make Every Investment Decision Count
In a speech at the USC Marshall School of Business in 1994, Charlie Munger, cofounder of Berkshire Hathaway, said that Buffett believes most investors would be better off in the long run if he could give each one a ticket with only 20 slots .�.�. representing all the investments that you got to make in a lifetime.
The root of this advice is the same as Buffetts other investing principles: A limit of 20 investments forces you to carefully consider every move, to be patient, and to not invest in businesses you dont understand. Youd also ensure youre confident enough about each investment that its worth missing out on another investment in the future.
Think about it: If you were buying a house or a car, would you buy it sight unseen, without an inspection, or on the word of some random person online? Probably not. Your investments deserve nearly as much deliberation.�
Buffett said in 1996 that every investors goal should simply be to purchase stocks in businesses that they are virtually certain will be earning more money in 5, 10, or 20 years. This diligence and patience has made Buffett one of the richest men in the world and could help your portfolio as well.
