:max_bytes(150000):strip_icc()/warren-buffett-9f1693fc3a384f2fae99353ffec505b5.jpg "Investing Rules the Legendary Warren Buffett Lives By")
Longtime 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. Here are a few of his most famous ones.
Key Takeaways
- Longtime Berkshire Hathaway CEO Warren Buffett ranks as one of the richest people in the world.
- Buffett is seen by some as the best stock-picker in history and his investment philosophies have influenced countless other investors.
- One of his most famous sayings is “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
- Another is “If the business does well, the stock eventually follows.”
Alison Czinkota / Investopedia
Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1
Buffett personally lost about $25 billion in the financial crisis of 2008 and his company, Berkshire Hathaway, lost its revered AAA rating. So how can he tell us to never lose money?
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 that he thoroughly researches and understands. He doesn’t go into an investment prepared to lose and neither should you.
Buffett believes that 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 Buffett stays focused on his goals in good times and bad and so should all serious investors.
Warren Buffett rarely changes his long-term investing strategy no matter what the market does.
Rule No. 3: If the Business Does Well, the Stock Eventually Follows
When choosing investments, 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? It’s a stock that Buffett might want to own if the company’s share price is trading below expectations for its future growth.
Buffett never buys stock in a company unless he can write down the reasons he’s willing to pay a specific price per share. Other investors could benefit from the same exercise.
Rule No. 4: It’s 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 reasonable, if not rock-bottom, prices. His goal is to build a portfolio of stocks that will reward him with solid profits and capital appreciation for years to come. When the markets reeled during the 2007-2009 financial crisis, Buffett used the opportunity to stockpile venerable long-term investments by spending billions on names like General Electric and Goldman Sachs.
To pick stocks effectively, disciplined investors establish their criteria and stick to them. You might seek companies that offer a high-quality product or service and also have solid operating earnings and the germ for future profits. You might establish a minimum market capitalization that 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 that the price you pay for a stock isn’t the same as the value you get in return. Successful investors know the difference.
$121 billion
Berkshire Hathaway CEO Warren Buffett’s net worth as of August 2023, according to Bloomberg.
Rule No. 5: Our Favorite Holding Period Is Forever
Warren Buffet is the ultimate exponent of a buy-and-hold philosophy.
How long should you hold a stock? Buffett says you shouldn’t own it for 10 minutes if you don’t feel comfortable owning it for 10 years. Buffett held on to the bulk of his portfolio even during the financial crisis, which he referred to as an “economic Pearl Harbor.”
Committing to long holding period will keep an investor from acting too human unless a company has suffered a sea change in prospects, such as impossible labor problems or product obsolescence. Being overly fearful or greedy can cause investors to sell stocks at the bottom or buy at the peak and destroy portfolio appreciation in the long run.
What Is the Essence of Buffett’s Investing Principles?
The short answer is to buy undervalued stocks with solid long-term potential. The longer answer is that it requires research and a steady commitment to the companies you’re investing in. Hold them through thick and thin, ignoring market volatility, unless something material changes in the company’s outlook, such as product obsolescence.
What Metrics Does Buffett Look at When Analyzing a Particular Stock?
In addition to analyzing the long-term business prospects of a company, such as whether it has competent senior management and a solid balance sheet, Buffett is known to focus on market capitalization (not too small), debt levels (not too great), and earnings per share (not too high). He’s looking for solid companies with sound balance sheets today and positive long-term outlooks, investments that he can hold for a long period of time.
What Is the Ideal Holding Period for an Investment?
Buffett might blithely answer “forever” to that question, and that’s not far from the truth. He will maintain his portfolio and may even add to it if certain holdings drop to an attractive price level, even during extreme market volatility. Buffett is a long-term value investor who sees volatility as an opportunity to buy at appealing levels or to take profit and sell some of his holdings if they’ve overshot what he believes to be a reasonable price.
The Bottom Line
It’s safe to say that Warren Buffett is an investor nonpareil. He has accomplished this by sticking to some very basic rules for buying and holding investments in his portfolio. But beyond the simple rules, his methodology for picking stocks involves a great deal of research aimed at establishing a fair price for a particular stock.
The rest of the market may be in a panic-selling mode, but Buffett sees opportunities as prices fall to his predetermined fair valuation. It might be said that he likes Stock XYZ but not at its current market price. He’s ready to buy it if the price of that stock drops to his preferred value range. To paraphrase Buffett, the market is there to accommodate your investing strategy but only when the price is right.
