Important investing lessons from Warren Buffett

Important investing lessons from Warren Buffett

Warren Buffett is one of the greatest investors of all time and also one of the best teachers of investing. Here we discuss some of the lessons he has offered through his annual reports and countless interviews that you can use to invest better and reach your financial goals.


  • Invest unemotionally – Many people make systematic errors in their investment thinking due to their emotions, egos and innate cognitive biases. Emotions reduces investment returns, in contrast Warren Buffet investment decisions are insulated from such emotions.  He thinks long-term, and so he doesn’t panic when the market falls, instead he sees drops as buying opportunities. To invest better, learn how emotions lead to cognitive errors, so that you can avoid those errors and benefit when others make them.


  • Ignore modern financial theory – Buffet believes that modern financial theory is fundamentally flawed. His consistent long-term success is evidence that the efficient market hypothesis is wrong. He thinks diversification is counterproductive for anyone skilled at investment selection. He says that financial models oversimplify things, underestimating the frequency of black swans and assuming that what hasn’t happen can’t happen. Markets are more dependent on behavioral science than physical science, but the models don’t adequately factor in human behavior. Investing is part art and part science. and the models don’t capture the artistic side of the process. Buffett therefore believes that you are better off ignoring most of the modern financial theory.


  • Stock Picking isn’t hobby – Everybody can be an investor but not everyone should choose their own investment. To be a successful investor requires thousands of hours of deliberate effort to master the necessary skills and then thousands more to use those skills to find worthwhile investments. If you aren’t willing to put in the time and effort that stock picking requires, the person on the other side of your trades is likely to know more than you, which leads to under performance.


  • Invest in what you understand – Buffett puts more focus on the importance of having a circle of competence, a clearly defined industry, business model, asset class, investment style etc. and investing only within that circle. You should continue to learn and thereby expand your circle of competence, but until you do, you shouldn’t invest where you aren’t skilled. He wants understandable businesses because he intends to hold long-term and wants to be able to predict roughly what the business will look like in five or ten years.


  • Know what a good company looks like – Buffet wants a business that is easy to understand, with a consistent operating history, good long-term prospects, possibly due to some durable competitive advantages, trustworthy, high-quality management team, solid financials ( high margins, high return on equity and high free cash flow).


  • Stock Ownership is a business ownership – When you buy stock, don’t think of it as a line on a chart you hope will move up. Think of it as partial ownership in the underlying business. If the business does well over time, the stock price eventually follows.


  • Be Cheap – The key to Buffett’s strategy is to find good companies at good prices. Price is what you pay, value is what you get. When value exceeds price, we have a margin of safety. A large margin of safety enables you to be successful even if your valuation is slightly off or things don’t go as expected.


  • Be loss-averse – Don’t strive to make every last dollar of potential profit; doing so exposes you to too much risk, instead make preservation of capital your top goal. By staying focused on loss avoidance, you will naturally gravitate towards investments with more upside potential than downward potential which will help your returns.


  • Be Patient – To resist the temptation to trade in and out positions, Buffett suggests pretending you can only make twenty trades your whole life. Under this restriction, you would be much more likely to do detailed research, and only move forward on a trade if you were very confident in it. This would force you to be patient both when buying and while holding. The right mentality is to get rich slow.


  • Volatility is your friend – Being risk-averse doesn’t mean avoiding volatility. Volatility is the best friend of the unemotional, patient, debt-free investor. A wildly fluctuating market means that solid businesses will occasionally be available for you to buy at irrationally low prices.


  • Learn from Masters  – Find some experts who have proven record of outstanding risk-adjusted performance in good times & bad, and who openly and honestly share their lessons, and then listen to them.


  • Avoid Taxes – Know the tax laws and use them to your advantage. Know how an investment will be taxed before you buy it. Avoid highly taxed short-term capital gains or use short-term losses tactically to offset them. If possible, structure your assets or your business or your career to emphasize capital gains rather than income, which generally has higher tax rates.  Avoid but not evade taxes. Pay all the taxes you are legally required to, but not more than that.

By – John M

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