Rules That Warren Buffett Lives By
By STEPHANIE LOIACONO
Updated Sep 3, 2020
Berkshire Hathaway CEO Warren Buffett is
arguably the world's greatest stock investor. He's also a bit of a philosopher.
Buffett pares down his investment ideas
into simple, memorable sound bites. Do you know what his homespun sayings
really mean? Does his philosophy hold up in all economic environments? Find out
below.
KEY TAKEAWAYS
- Berkshire
Hathaway CEO Warren Buffett is continuously ranked as one of the richest
people in the world.
- He is seen by
some as being the best stock picker in the world, with his investment
philosophies and guidelines influencing numerous investors.
- One of his
most famous sayings is "Rule No. 1: Never lose money. Rule No. 2:
Never forget rule No. 1."
- Another one
is "If the business does well, the stock eventually follows."
- The third is
"It's far better to buy a wonderful company at a fair price than a
fair company at a wonderful price."
"Rule No. 1: Never lose money. Rule
No. 2: Never forget rule No. 1."
He's referring to the mindset of a sensible
investor. Don't be frivolous. Don't gamble. Don't go into an investment with a
cavalier attitude that it's OK to lose. Be informed. Do your homework. Buffett
invests only in companies he thoroughly researches and understands. He doesn't
go into an investment prepared to lose, and neither should you.
Buffett believes the most important quality
for an investor is temperament, not intellect. A successful investor doesn't
focus on being with or against the crowd.
The stock market will experience swings.
But in good times and bad, Buffett stays focused on his goals, and so should
all investors. This esteemed investor rarely changes his long-term investing
strategy no matter what the market does.
"If the business does well, the stock
eventually follows."
"The Intelligent Investor" by
Benjamin Graham convinced Buffett that investing in a stock equates to owning a
piece of the business. So when he searches for a stock to invest in,
Buffett seeks
out businesses that exhibit favorable long-term prospects. Does the
company have a consistent operating history? Does it have a dominant business
franchise? Is the business generating high and sustainable profit margins?
If the company's share price is trading below expectations for its future
growth, then it's a stock Buffett may want to own.
Buffett never buys anything unless he can
write down his reasons why he'll pay a specific price per share for a
particular company. It is advised that all investors do the same.
"It's far better to buy a wonderful
company at a fair price than a fair company at a wonderful price."
Buffett is a value investor who
likes to buy quality stocks at rock-bottom prices. His real goal is to build
more and more operating power for Berkshire Hathaway by owning stocks that will
generate solid profits and capital
appreciation for years to come. When the markets reeled during the
2007-08 financial crisis, Buffett was stockpiling great long-term investments
by investing billions in names like General Electric and Goldman Sachs.
To pick stocks well, investors must set
down criteria for uncovering good businesses and stick to their discipline. You
might, for example, seek companies that offer a durable product or service, and
also have solid operating
earnings and the germ for future profits. You might establish a
minimum market capitalization you're willing to accept, and a maximum price-to-earnings
(P/E) ratio or debt level. Finding the right company at the right
price—with a margin for safety against unknown market risk—is the ultimate
goal.
Remember, the price you pay for a stock
isn't the same as the value you get. Successful investors know the difference.
$83 billion
Berkshire Hathaway CEO Warren Buffett's net
worth, as of Sept. 2, 2020, making him the sixth richest person in the world.
"Our favorite holding period is
forever."
How long should you hold a stock?
Buffett
says if you don't feel comfortable owning a stock for 10 years, you shouldn't
own it for 10 minutes. Even during the period he called the "Financial
Pearl Harbor," Buffett loyally held on to the bulk of his portfolio.
Unless a company has suffered a sea change
in prospects, such as impossible labor problems or product obsolescence,
a long holding period will keep an investor from acting too human. Being too
fearful or too greedy can cause investors to sell stocks at the bottom or buy
at the peak and destroy portfolio appreciation for the long run.