If we want to invest like the best, it’s useful to learn from the best.
And when it comes to investing, Warren Buffett has few peers that can match up with his long-term investment track record.
Also known as the “Oracle of Omaha”, the 90-year-old veteran investor has managed to compound his wealth over decades to reach US$100 billion.
His discipline, hard work and patience have been an inspiration for a legion of investment fans.
In addition to his investment savvy, the man is also a master of language.
His quotes on businesses and investing have been widely circulated over the years, and many of them provide valuable lessons for those who wish to emulate his success.
Here are five nuggets of wisdom that are worth highlighting.
1. Never invest in a business you cannot understand
When investing, always ensure that you pick a business that you can easily understand.
If you cannot explain how the business makes money in a few sentences, then you are probably better off avoiding it.
An example of a business that is easy to understand is Jumbo Group Ltd (SGX: 42R).
The company owns a chain of seafood restaurants in Singapore and China that sells delectable chilli crab as its signature dish.
On the other hand, investors may struggle to comprehend how Wilmar International Limited (SGX: F34) makes its money.
The blue-chip company deals with a wide range of commodities that are exposed to a multitude of variables that are out of the company’s control.
2. Rule number one: don’t lose money, rule number two: don’t forget rule number one
Buffett’s first rule emphasizes the importance of looking at risks while investing.
Many investors tend to focus excessively on the rewards while ignoring or downplaying the risks.
Such a practice is dangerous as the probability of a permanent loss of capital is high if an investor neglects to take care of his downside.
This rule is so important that he mentions it again as his second rule — remember not to forget rule number one!
3. It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price
When scouting around for suitable investments, there’s a tendency to look for stocks that are cheap using traditional valuation metrics.
Some investors even take this one step further by rummaging through the bargain bin to look for beaten-down, neglected companies.
While some of these businesses may turn out to be gems in the rough, more often than not, these companies are cheap for a reason.
Some may have lost their competitive edge, resulting in its products and services facing declining demand.
Or the company could be in a sunset industry and has failed to stay relevant.
Even if you managed to buy such a company at a “wonderful price”, you’d only end up owning a mediocre business at best.
But when it comes to quality, well-run businesses that display promising growth, Buffett advises us to be willing to pay a premium for them.
Being willing to cough up money to own a great business means that you can enjoy many more years of rising profits and dividends.
4. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful
When most investors are feeling bullish and optimistic, it’s time to be wary.
Overly optimistic projections may push valuations to unsustainable levels, egged on by momentum traders who are focused only on the share price.
The prudent investor should hold back from joining the frenzy to keep his capital safe.
Conversely, when there is bad news all around and pessimism reigns, especially during a crisis, you should stand ready to open your wallet to deploy your capital.
When most investors are despondent and fearing only the worst, expectations for future growth are at their lowest.
By being “greedy”, you can minimise your risk of losses while also participating in the recovery.
5. Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing
In a nod to the importance of psychology in investing, the Oracle of Omaha reminds us that being successful in investing isn’t just about being intelligent.
Being smart is only half the battle won.
And it is hardly enough.
Having the right temperament to stay steadfast during your investment journey is equally important.
Buffett achieved his level of success by being disciplined and staying true to his principles even though the environment changed drastically over the decades.
Only by conquering your greed and fear will you be able to follow through on your investment plan and be able to achieve your investment objectives.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.