4 Money : Ten pieces of investment advice from Warren Buffett

Warren Buffet is widely recognized as the greatest investor of all time. As of April 2022, he is the chairman and CEO of Berkshire Hathaway, with a net worth of more than $125 billion, making him the world's fifth wealthiest person.

We've all made stupid investing decisions and lost money at some point in our life, so there's no shame in learning from the Guru himself.

Below are some excellent suggestions from the man, which I feel can assist us in identifying unprofitable investments and avoiding traps that reduce returns and imperil our financial objectives.

1. Invest in what you know…and nothing more. - One of the easiest ways to make an avoidable mistake is getting involved in investments that are overly complex.

“Never invest in a business you cannot understand.” – Warren Buffett

2. Never compromise on business quality-While saying “no” to complicated businesses and industries is fairly straightforward, identifying high quality businesses is much more challenging. Companies that earn high returns on the capital tied up in their business have the potential to compound their earnings faster than lower-returning businesses. As a result, the intrinsic value of these enterprises rises over time. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett

3. When you buy a stock, plan to hold it forever

Once a high-quality business has been purchased at a reasonable price, how long should it be held? “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffett

4. Diversification can be dangerous -In his view, individual investors gain most of the benefits of diversification when they own between 20 and 60 stocks across a number of different industries.

“Opportunities come infrequently. When it rains gold, put out the buck, not the thimble.” – Warren Buffett

5. Most news is noise, not news- Imagine how many pieces of gloom-and-doom “news” originated over their corporate lives. However, they are still standing.Does it really matter if Coca-Cola missed quarterly earnings estimates by 4%?

Should I sell my position in Johnson & Johnson because the stock has slid by 10% since my initial purchase? With falling oil prices lowering Exxon Mobil's profits, should I sell my shares?

“Remember that the stock market is a manic depressive.” – Warren Buffett

6. Investing isn’t rocket science, but there is no “Easy Button” -Perhaps one of the greatest misconceptions about investing is that only sophisticated people can successfully pick stocks. However, raw intelligence is arguably one of the least predictive factors of investment success. “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” – Warren Buffett

“Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood…these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the models. Beware of geeks bearing formulas.” – Warren Buffett

7. Know the difference between price and value - Stock prices are pushed at us nonstop. For some reason, investors love to fixate on ticker quotes running across the screen. However, stock prices are inherently more volatile than underlying business fundamentals (in most cases).In other words, there can be periods of time in the market where stock prices have zero correlation with the longer term outlook for a company.

“During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well.” – Warren Buffett

“Price is what you pay. Value is what you get.” – Warren Buffett

8. The best moves are usually boring -Investing in the stock market is not a path to get rich quickly. If anything, I believe the stock market is best meant to moderately grow our existing capital over long periods of time. Investing is not meant to be exciting, and dividend growth investing in particular is a conservative strategy. Rather than try to find the next major winner in an emerging industry, it is often better to invest in companies that have already proven their worth.

“We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.” – Warren Buffett

9. Low-cost index funds are sensible for most investors - We hurt our performance in many different ways – trying to time the market, taking excessive risks, trading on emotions, venturing outside our circle of competence, and more.Even worse, many actively managed investment funds charge excessive fees that eat away returns and dividend income.Despite his status as arguably the most prolific stock picker of all-time, Warren Buffett advocates for passive index funds in his 2013 shareholder letter. Once Buffett passes away and his Berkshire Hathaway shares are given to charity, Buffett’s trustee has clear instructions to follow: “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.” – Warren Buffett

10. Only listen to those you know and trust

Throughout his shareholder letters and occasional interviews, Warren Buffett emphasizes the importance of only investing in trustworthy, competent management teams.Simply put, Warren Buffett is very careful when it comes to selecting his business partners and managers. Their actions can make or break an investment for many years to come. “Once management shows itself insensitive to the interests of owners, shareholders will suffer a long time from the price/value ratio afforded their stock (relative to other stocks), no matter what assurances management gives that the value-diluting action taken was a one-of-a-kind event.” – Warren Buffett