Warren Buffett: 7 Things Every Beginning Investor Needs To Know
Written by
David Nadelle
Edited by
Nicholas Morine
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You could live longer than Warren Buffett’s current 94 years and only learn a fraction of what “The Oracle of Omaha” knows about investing. After all, Buffett got interested in stocks when he was six or seven and bought his first stock when he was only 11 years old.
However, Buffett’s success is not attributable to his years on Earth alone. The world’s greatest investor follows a handful of fundamentals, or rules of investing, that have served him well throughout his long, successful career.
While Buffett’s expertise can help seasoned investors take their portfolios to the next level, his basic investing principles should be studied by anyone looking to get into the investing game.
Here are seven key insights from Buffett that every new investor should know, with quotes taken from a Buffett talk to MBA Students at the University of Florida School of Business on October 15, 1998, and YouTube appearance clips.
1. ‘You are not buying a stock, you are buying part ownership in a business.’
Sure, investing is putting out money to be sure of getting more back later at an appropriate rate — but for Buffett, it’s never been about investing in “some little ticker symbol,” but rather buying part of a reputable and well-run business.
Novice investors should heed his advice and focus on companies with solid fundamentals — such as strong earnings, low debt and good management — rather than those with inflated prices due to hype. When Buffett started to think of investing differently, “everything else followed.”
2. ‘You can understand some businesses but not all businesses.’
Buffett emphasizes how crucial it is to comprehend the businesses or assets you are investing in. It is difficult to forecast a company’s future success if you don’t know how it generates revenue.
For beginners, it’s important to concentrate on sectors or companies you are familiar with, or spend some time learning about them, before investing your money.
3. ‘Never risk permanent loss of capital.’
As the Young Investors Podcast co-host and financial influencer Hamish Hodder mentioned in on of his YouTube videos, Buffett has leaned on this Berkshire Hathaway principle for six decades. Avoiding permanent capital loss requires avoiding high-risk undertakings that could result in considerable financial loss.
Some losses are unavoidable, but you want to avoid absolute bankruptcy, which could force you out of the game for ever.
4. ‘Diversification is protection against ignorance.’
One of Buffett’s most famous sayings is often quoted by would-be investors, but seldom followed. For Buffett, having one “super-wonderful business” but investing in another further down your list of attractiveness — instead of putting more money into your “number 1” — is madness.
Actually, Buffett believes that the vast majority of investors should diversify (typically, in exchange-traded funds [EFTs]) if they don’t have the time to analyse stocks and become an informed money manager.
However, “If you really know businesses, you probably shouldn’t own more than six of them,” he said.
5. ‘You can only live life forward.’
Buffett acknowledges past mistakes and hesitations that have cost him dearly, but it’s the future he’s more concerned with. You can learn a lot from your mistakes, but don’t let them hinder your progress and goals.
“We just figure there is so much to look forward to that there is no sense thinking of what we might have done,” Buffett said.
6. ‘I don’t think about the macro stuff.’
Things like a shaky economic climate and interest rate fluctuations are important, but they’re only important to Buffett if they will affect his “knowable” view of investing in a business or his “circle of confidence.”
The same goes with jumping into a hyped industry or trending stock predictions that are unfamiliar and outside your investment scope.
In the general scheme of things, investment decisions are based on a things like a firm’s price or a sound future valuation analyses for Buffett, not emotional or irrelevant factors.
7. ‘What we really want to do is buy businesses that we would be happy to own forever.’
As mentioned above, Buffett suggests beginner investors focus on companies with solid fundamentals — those with strong earnings, low debt and good management — rather than those with inflated prices due to hype, and let their investments develop and compound over time by holding onto them for an extended period.
In the words of the man himself: “I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they will be 10 years from now. If I can’t see where they will be 10 years from now, I don’t want to buy it.”
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