Top 6 Things We Can Learn From Warren Buffett – Part 1 (2016 Update)

Things We Can Learn From Warren Buffett
Things We Can Learn From Warren Buffett

Warren Buffett is one of the most recognized and best performing investors in the world. With historical returns for his Berkshire Hathaway shareholders that are astronomical, there is no doubt all investors can learn a thing or two from him.

As an indication of his investment prowess, consider that $1,000 invested in 1964 would be worth over $11.6 million dollars today. If you are thinking that you would never have had the option to invest in this fund way back in 1964, consider that an investment of $1,000 in 1990 would be worth over $33,000 today. That is after the huge returns he already generated, indicating that Buffett has and continues to know how to invest.

As an individual do-it-yourself investor, there is a lot to learn from Buffett about how he invests his money. That is not to suggest that we will all become successful investors like him. However, what it does suggest is that when a proper process is applied to our investment portfolios we can improve our chances of success.

Here are six things we can learn about investing from Warren Buffett. This article will cover the first three and part two will highlight the next three.

#1: Remove Emotion from Your Investment Decisions

Buffett has been quoted to say, “The key to success is emotional stability.”. This is great advice for investors because we are often at our worst. This is especially so when it comes to making decision centered around money.

Think about that time when you bought shares in a good company. But the market was taking the share price down with it. Your brain will more than likely tell you to sell because we are hard wire to hate losing money. The emotion of fear was trying to dictate what to do. However, if you are able to remove emotion and look at the situation objectively, you will often determine that the reasons for the decline is because of the market and not the stock. In these situations, stocks which you bought almost always end up higher in the long run.

#2: Sometimes the Best Action is No Action at All

Falling along the same lines as keeping emotions out of your investment decisions, the second thing we can learn from Buffett is that inaction can be a huge benefit. Active investors and traders often end up buying and selling at precisely the wrong times. In addition, buy and hold investors, assuming their investment choices were sound in the first place, avoid the huge fees and transaction costs associated with lots of this buy and selling.

For example, Buffett bought Coca Cola in the late 1980’s and has seen a number of up and down years. Some of those years surely would have been tough to hold as the company struggled and share price lagged. However, staying the course has paid of as Coca Cola continues to pay big dividends. In addition, the share price has steadily rise over the long term.

#3: An Index Portfolio May Be the Best Option

Buffett has made a lot of money by buying individual stocks like Coca Cola, Procter & Gamble, and more recently Apple. However, he has also said that the best course of action for most investors is to not try to compete with the large Wall Street money firms by buying individual stocks. That takes a lot of work and constant monitoring to ensure the investments are still good companies.

The alternative strategy, and how he has instructed that the bulk of his estate be investment when he passes away, it to simply buy an index fund that tracks the S&P 500 and never sell it. Over the long-term (10+ years), the stock market has a habit of always ending up higher. In addition, most of the time the market ends up doing better than individual investors who do not have the time or skills to select those individual stocks. It may save you a lot of work and money over the long term.

These are the first three tips we can all learn from Buffett that will make you a better investor.  In Part 2, we will examine three more.

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