Warren Buffett is arguably the best-known, most-respected investor of all time (even if he’s made the occasional investing mistake). The CEO of Berkshire Hathaway and legendary “Oracle of Omaha” is also known for his folksy charm and memorable quotes about the art of investing.
When you aim to reach the top of the mountain, it’s wise to closely follow the footsteps of those who have successfully made the climb before you. Your odds of investing success can increase exponentially if you learn and apply Buffett’s best investing tips.
Last updated: Nov. 17, 2020
1. Never Lose Money
One of Buffet’s most popular pieces of advice is this: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” If you start off losing money it’s that much harder to get back to where you started, let alone see your investments grow. Translated to the stock market, this advice means you should cut your losses rapidly and let your winners run.
2. Get High Value at a Low Price
In a 2008 letter to Berkshire Hathaway shareholders, Buffett offered up another key principle of his: “Price is what you pay; value is what you get.” Losing money can happen when you pay a price that doesn’t match the value you get, such as when you pay high interest on credit card debt, spend on items you’ll rarely use or pay more than you should for a stock.
In the stock market, this admonishment by Buffett means to never overpay for a stock — no matter how good you think it is. This is why Buffett’s portfolio is typically littered with so-called “value names” like banks and consumer goods companies rather than high-flying stocks like Tesla.
3. Make Investing Habitual
In a 2007 address at the University of Florida, Buffett said, “Most behavior is habitual, and they say that the chains of habit are too light to be felt until they are too heavy to be broken.” Work on building positive money habits and breaking those that hurt your wallet. You can accomplish this by regularly adding money to your stock portfolio, regardless of what the market is doing at any given time.
4. Don’t Invest on Margin
Buffett built his wealth in part by keeping leverage and interest payments to a minimum. “I’ve seen more people fail because of liquor and leverage — leverage being borrowed money,” he said in a 1991 speech at the University of Notre Dame. “You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
Many novice traders are enticed by the lure of “free money” offered by margin accounts, which use borrowed money to invest in more stocks. The problem with using margin to buy stocks is twofold. First off, you’ll be paying interest on the money you borrow. Second, you’re leveraging your investment, so if it turns against you, you can lose more than you originally put in. Both go against Buffett’s investment principles.
5. Keep Some Dry Powder
Another key to stock market success is to always keep cash reserves on hand. “We always maintain at least $20 billion — and usually far more — in cash equivalents,” Buffett said in the 2014 Berkshire Hathaway annual report.
Buffett doesn’t keep cash on hand for the meager interest rate it earns — he uses it as “dry powder” for when there’s a big market selloff. If you’re fully invested at all times, you won’t have any money available to take advantage of the low prices you can get on stocks during a correction or market crash. With cash on hand, you’ll be able to rush in and scoop up some bargains.
6. Invest In Yourself
One of Buffett’s most oft-cited quotes is, “Invest in as much of yourself as you can. You are your own biggest asset by far.” He echoed those sentiments in a CNBC interview when he said, “Anything you do to improve your own talents and make yourself more valuable will get paid off in terms of appropriate real purchasing power.”
This is particularly true when it comes to investments. If you take the time to learn the fundamentals about finance and the stock market, your knowledge will pay long-term dividends in the form more successful investments.
7. Learn About Money
Part of investing in yourself should be learning more about managing money. As an investor, much of Buffett’s job consists of limiting exposure and minimizing risk. “Risk comes from not knowing what you’re doing,” Buffett was quoted by Forbes. The more you know about personal finance, the more security you’ll have as you minimize risks.
The lesson from this Buffett quote is to actively educate yourself about personal finance. As Charlie Munger, Buffett’s partner, put it: “Go to bed smarter than when you woke up.”
8. Trust a Low-Cost Index Fund for Your Portfolio
While much of Buffett’s wisdom and advice borders on the philosophical, he has also provided some actionable tips that nearly anyone can apply. For instance, Buffett urges the average investor to purchase index funds.
“Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund,” he wrote in his 2013 letter to Berkshire Hathaway shareholders.
Buffett has given this advice for years. In Berkshire Hathaway’s 2004 annual meeting, he said, “If you invested in a very low-cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90 percent of people who start investing at the same time.”
9. View Investing as a Long-Term Game
Buffett once said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” And it’s true. Planting and nurturing the seeds of financial success now will lead to shade to enjoy later in life. That shade might include freedom from debt, a secure retirement or the ability to cover the cost of college for your children.
Such a long-term view of money is central to Buffett’s investing decisions. In his 2014 letter to shareholders, he said people should “invest with a multi-decade horizon … Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime.” He urged investors not to focus on moments of stock market volatility or economic crisis.
Building true wealth and financial security takes time, and you’ll likely encounter financial challenges along the way. But continuing to regularly invest in stocks can help you benefit from compound returns over time. Viewing your investments as a long-term commitment can help you stay on course despite occasional financial hardships. This gives you a financial foundation that will last.
10. Practice Dollar-Cost Averaging
Warren Buffett might enjoy sitting on a large pile of cash so he’s ready to take advantage of market selloffs, but he’s no market timer. He has held many of the stocks in his portfolio for years, even decades, and is a firm believer in adding to positions over the long haul.
Thanks to the rise of zero-commission brokerage houses and the availability of fractional shares, dollar-cost averaging is easier than ever. The idea is to regularly invest in shares of companies you already own, regardless of what is happening in the stock market. In the words of Buffett: “Don’t put your money in all at once; do it over a period of time.”
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John Csiszar contributed to the reporting for this article.