Warren Buffett’s 7 best pieces of investing advice

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When Warren Buffett offers investing advice, everyone listens. The world’s greatest investor has never been shy about the strategies that have helped him amass a $72 billion net worth and grow his company, Berkshire Hathaway, into a juggernaut valued at over $212 billion. 

But one thing he doesn’t do is encourage the average individual investor to try to mimic his success. The best advice he can give those investors, Buffett has said, is to do exactly the opposite. We’ve parsed through some of Buffett’s more popular insights on investing to come up with a few that apply to the average worker looking simply to invest for long-term, steady growth.

1. The worst investment you can make over time: cash. 

We always keep enough cash around so I feel very comfortable and don't worry about sleeping at night. But it's not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially. 

2. Invest in a broad-based index fund that tracks the S&P 500. 

If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund, and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.

Recommended reading: “Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor” by Vanguard founder Jack Bogle. Any investor in funds should read [Bogle’s books]. They have all you need to know.

3. Invest in yourself. 

“The best investment you can make is in your own abilities. Anything you can do to develop your own abilities or business is likely to be more productive.” 

4. If you’re determined to pick stocks, don’t buy into a business you don’t understand. 

[Individual investors] ought to think about what he or she understands. Let's just say they were going to put their whole family's net worth in a single business. Would that be a business they would consider? Or would they say, "Gee, I don't know enough about that business to go into it?" If so, they should go on to something else.... There are all kinds of businesses that [longtime partner and vice chairman of Berkshire Hathaway Charlie Munger] and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do.

5. Focus on the competition as well. 

[Buying stock in a company is] buying a piece of a business. If they were going to buy into a local service station or convenience store, what would they think about? They would think about the competition, the competitive position both of the industry and the specific location, the person they have running it and all that. 

6. Invest for the long haul. 

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes”

7. The hardest part about investing: trusting yourself. 

You need to divorce your mind from the crowd. The herd mentality causes all these IQ's to become paralyzed. I don't think investors are now acting more intelligently, despite the intelligence. Smart doesn't always equal rational. To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible.

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Question : Warren Buffett says he understands compounding in a way most people don't. What does he mean?

Answer: Buffett , according to his letter to shareholders, “only” provided around 20% return on average, compounded, per year.

20% does not sound much. But when compounded over 60 years, it brought him from a few million dollars to top 3 richest person on the planet.

Mostly this is because when you invest in stock, you don’t pay capital gain tax until the year you sell the stock. So if you never sell it, you never have to pay tax on it.

Let’s assume someone buys and sell every year a company that increase in value by 15% a year. Assume Capital Gain tax is 30% for short term investment and 20% for long term investment.

Here is the difference between the two’s wealth after 60 years

Even if Buffett still have to pay 20% tax on his 6.19 times greater wealth after 60 years, he is still 5 times richer than buy and sell investor.

So the key to minimize your tax and maximize your compounding is finding great companies that grow in very long term, then never selling it for quick short term profit.

 

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I found this article interesting....

What are Warren Buffet's best strategies for stock investment?

1. Don’t over-diversify. While Berkshire Hathaway’s portfolio consists of several dozen stocks, you’ll notice the top 5 stocks comprise more than 50% of the overall portfolio! Warren believes that you should find a few stocks/companies you truly believe are excellent investment opportunities (after diligent research!) and invest heavily in them. If your portfolio has too many different stocks, these excellent investments will comprise a smaller percentage of your portfolio, and you won’t be able to garner much of those great returns.
2. Stay within your circle of competence. If your friend starts telling you to invest in Chevron and Phillips 66, but you know nothing about oil, maybe it’s not the best idea to listen to your friend (even if he/she has a point!). Don’t invest in stocks that you can’t fully explain and understand why exactly they are great buying opportunities.
3. The best holding period is forever. Fun fact: day traders lose more money on average than gain from this practice (per The Millionaire Next Door). You’ll lose more money in taxes (capital gains taxes are significantly less if you hold for 1 year or longer) than you’ll gain via single-day transactions.
4. Growth stocks are overrated. Ben Graham says it beautifully in The Intelligent Investor—the way to succeed with growth stocks is to buy at a low price, and sell at the peak… and the chances of you successfully executing this is as likely as you finding money on trees. According to a study that followed index funds over the course of several decades in the mid-1900s, over 90% of professionally-managed growth funds failed to beat the market. And if these professionals can’t beat the market despite their formal training, experience, technology, and resources, what makes you think you can, as an everyday investor?
5. The “boring” stocks are often well-valued. People always want to buy the sexy stocks—Facebook, Amazon, you name it. This means that “boring” old-school stocks, like Kraft Heinz for instance, are left aside and forgotten by the everyday investors. Because of this sentiment (or lack thereof), these “boring” stocks are often extremely well-valued. Buying stable stocks at great value will often pay off more than buying “sexy” growth stocks at hiked-up prices.

https://www.quora.com/What-are-Warren-Buffets-best-strategies-for-stock-investment

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