Warren Buffett Teaches Us: One of the most successful investors of our time is Warren Buffett, who serves as the chief executive officer of Berkshire Hathaway. However, there is more to the Oracle of Omaha than meets the eye. Additionally, Buffett is a fantastic writer. He is in the habit of penning a letter to the shareholders of Berkshire Hathaway at the end of each year. And as was to be expected, one of the most anticipated events in the financial sector is Warren Buffett’s annual letter to shareholders. The fact that they are written by one of the wealthiest investors in the world is reason enough to read them, but much more compelling is the fact that he conveys general investment expertise in a clear and concise style that anybody can understand.
The annual letters that Warren Buffett writes provide an insightful view of the financial markets. He discussed the many blunders that are made by investors, particularly those who are just starting in the field. When you invest your money using these nine teachings from Warren Buffett, you not only improve your chances of making money but also dispel the majority of the myths around investing.
The entirety of these letters can be read in their entirety on the Berkshire Hathaway website. You can get an idea of the thoughts that he and his entire team have regarding the investment strategy, stock ownership, corporate culture, and other such topics. Because there are a lot of letters, we have condensed them into 7 meaningful lessons and posted them on this site.
1. Invest in Stocks to Own Them, Not for Speculation
When purchasing a stock, the majority of investors quickly become fixated on the purchase price, which is a frequent observation. After then, people make it a habit to check the price of the stock numerous times at various points during the day. Several people have a difficult time avoiding the urge to check the price multiple times daily. Within the scope of this discussion, Warren Buffett’s annual letter from 1996 brought up an intriguing subject. He gave the following piece of advice: “Don’t even consider holding a stock for ten minutes if you aren’t willing to own it for ten years,”
In essence, the point that Buffett is trying to make is that rather than worrying about the day-to-day happenings, one should make it their mission to search for specific items. For instance, businesses that produce excellent goods have significant advantages over their competitors and offer reliable profits for the foreseeable future. Therefore, “never invest without having the mindset of an owner.”~Warren Buffett
2. When others are greedy, show fear; when others are fearful, show greed. 4. Be fearful when others are greedy.
Buffett thinks that the financial markets are, on the whole, very efficient. In light of the aforementioned circumstances, “timing” one’s entry and exit in the market to achieve significant success is close to impossible.
Despite this, Warren Buffett has frequently underlined in his yearly letters the reality that there have been and will continue to phase such as natural disasters, wars, market crashes, and bubbles, among other things. In his annual letter for 2017, Warren Buffett made the following observation: “Though markets are normally sensible, they occasionally do strange things.” Making the most of the chances that were available at the time does not require a high level of intelligence, a degree in economics, or a working knowledge of Wall Street lingo.
In other words, Buffett thinks that astute investors should always keep an eye on the underlying value of the companies in which they invest. If investors can do this, they will invariably move in the opposite direction of the majority of traders and get additional benefits from doing so. In the words of Warren Buffett: “Be fearful when others are greedy and greedy only when others are fearful.” ~Warren Buffett
3. Investing with borrowed money is a terrible idea at any time.
When it comes to things that get Warren Buffett’s goat, it has to be the practice of taking out loans to pay for stock purchases. When average people take out loans to invest in the stock market, according to Warren Buffett, they place their financial security in the hands of a volatile and unpredictable market that has the potential to be violent. When it comes to stocks that can be relied upon, such as Berkshire Hathaway, this holds as well.
Additionally, this notion was emphasized in Warren Buffett’s annual letter in the year 2017. He detailed the four significant drops that Berkshire stock had seen throughout its history. The price dropped by 37 percent or more in the space of just a few weeks during the dips.
In this particular setting, Buffett penned the following: “This table offers the greatest case I can muster against ever utilizing borrowed money to acquire stocks. There is absolutely no way to predict how far the stock market can collapse in such a short amount of time. And even if your positions aren’t immediately endangered by the dropping market and your borrowings aren’t very large, your mind could still be unsettled by the frightening headlines and frantic discussion. And a mind that is not at ease will not make sound choices regarding financial investments.
4. Stay away from companies that are too difficult to fully grasp before investing in them.
Many investors were caught off guard in 2016 when Berkshire Hathaway announced that it would be purchasing a one billion dollar stake in Apple. Why? Buffett has maintained for a long time that he has an “insufficient understanding” of technology and the companies that work in that field.
In his annual letter in 1986, Warren Buffett made the following observation: “if there is a lot of technology, we won’t grasp it.” On the contrary, this does not imply that Buffett was rigid about technological advancements. Before investing in a particular firm or industry, he wants to have a crystal clear understanding of the potential for growth, the competitive edge, and the longevity of that advantage.
In May of 2018, Buffett made a snide remark to the people who had purchased Bitcoin. He stated, “Just hoping that the next man pays more” for an object that does not have any worth that is derived from its inherent characteristics. Therefore, before diving headfirst into something too complicated for your comprehension, give it some serious consideration.
5. Recognize that Laziness Is A Virtue
Many people have the misconception that a great investor is someone who is constantly on the go. Or someone who spends their entire working day on the phone, conducting business with other people, networking, and negotiating deals. And then there is Warren Buffett, who promotes taking a significantly less active role in the investment process.
In his annual letter in 2005, Warren Buffett made the following observation: “Long ago, Sir Isaac Newton taught us three laws of motion. Despite the brilliance of his work, Sir Isaac was not successful in the financial markets. He subsequently explained that although he could calculate the movement of the stars, he could not foresee the irrationality of men. He had lost a lot of money in the South Sea bubble.
Buffett continued by saying, “If Newton had not been traumatized by this loss, Sir Isaac might very well have gone on to establish the fourth rule of motion for investors as a whole, which states that returns decline as motion increases.” To summarize, the actual action for ordinary investors is inaction rather than action.
6. Time is the best friend of successful businesses and the worst enemy of those with average results.
Buffett frequently acknowledges that his purchase of Berkshire Hathaway, the textile company, was the most significant error he made as an investor. As it turns out, this tale does have some elements of fact. After all, he had invested money into a subpar business that was going nowhere fast and was consuming a lot of capital. If he had invested his money in insurance firms, he would have been able to generate an additional $200 billion in profits over the next 45 years.
The finest explanation of the compounding effect time has on returns may be found in Warren Buffett’s annual letter from 1989. He made the statement that “time is a friend for outstanding enterprises and an enemy for the mediocre ones.” Time is a friend for wonderful businesses.
To put it another way, Buffett maintains that sticking to a company that is not producing value is likely to be detrimental to an investor throughout their investment horizon. They provide returns that are below average and prevent the investor from accessing better possibilities to invest.
Therefore, Buffett advises investors to seek out quality companies rather than purchasing average ones and hoping against hope that their value will eventually increase. Those that not only have the ability to generate a healthy return but also have the ability to reinvest the money at equally healthy returns are the ones that will be successful. Therefore, we can consider them to be compounding machines. The investment equivalent of the Holy Grail can be found in companies like these. Instead of always seeking for fresh flowers to pluck, it would be more beneficial for you to plant the appropriate seeds and watch them grow once you have found them.
7. You should never invest in a company only because you believe it has a low price.
Who doesn’t get excited about a good deal? It seemed inevitable that Warren Buffett, a student of Benjamin Graham’s, would assimilate Graham’s “buy cheap” strategy because of their close relationship. Surprisingly, it did not turn out to be the situation. And Warren Buffett was able to get a significant amount of knowledge as a result of a string of unsuccessful acquisitions and investments that he had made at the beginning of his career as an investor.
In his annual letter in 1979, Warren Buffett discussed some of the blunders he has made with his investments. He is referring to the purchase of Waumbec Mills by Berkshire, which the company did for a price that was lower than the company’s operating capital. Although at first glance it appeared to be a fantastic opportunity for Berkshire Hathaway, the acquisition ultimately proved to be a poor investment on their part.
The reason for this is that regardless of how hard the company worked to turn around the failing business, it was never able to gain any progress in doing so. Additionally, the textile sector had just been in a downward spiral before this point. Buffett came away from this experience understanding the significance of having an economic moat and a return on investment.
In his annual letter in 2014, Warren Buffett made the following observation: “At Berkshire, we prefer owning a non-controlling but large piece of a superb company rather than owning 100 percent of a so-so business.” It is preferable to own a portion of the Hope Diamond rather than the entire rhinestone because it will increase its value.