By Peter Mastrantuono
Warren Buffett is considered one of the most successful investors ever, turning an investment of $140,000 at age 26 into over $100 billion—his current net worth at age 90.
While most investors will never be quite as successful, the beauty of his success is that it’s rooted in simple investment principles that anyone can follow.
8 Top Investment Lessons
- Buy stock with an owner mentality, not as a speculator: Investors should only buy stocks they are willing to own for ten years. Rather than look at recent price movements, find companies that make great products, have unassailable competitive advantages (a “moat” around their business), and have provided consistent returns over the long-term.
- Be fearful when others are greedy, and greedy when others are fearful: Whether it was the coronavirus pandemic or the 2008 credit crisis, fear drives many investors to sell stocks at the very worst time. As history suggests, these are the best times to be a buyer. (Paradoxically, Buffett sold his airline holdings amid the pandemic and did not make any big investments following the stock market implosion.)
- Returns decrease as motion increases: Many investors have the misperception that they must be constantly in action, tracking the market, reading research reports, and fine tuning their holdings. Warren believes that, rather than trading frequently, inactivity is the more intelligent approach.
- Never borrow money to buy stocks: Using margin to buy stocks places individuals’ financial health in the hands of a volatile and sometimes irrational market, exposing them to losses that could exceed their initial investment.
- Never invest in a business you don’t understand: Buffett stays within his circle of competence when investing. This caused him to miss out on investing early in technology because he admittedly did not understand their value. (Rather than miss out on these investment opportunities, however, it may behoove investors to seek out a trustworthy advisor to identify proven money managers that can help them profit from changes in technologies and business models.)
- Cash is a bad investment: While Buffett understands the need for liquidity, e.g., 6-12 months emergency fund, too many investors hold large amounts of cash to feel comfortable. Cash is a horrible long-term holding as it pays next to nothing and is certain to depreciate in value.
- America is not in decline: Since the 1970s the media, politicians, and talking heads have warned of inevitable national decline. These so-called experts have been consistently wrong, and Buffett believes they are wrong today. The ability of the American system to unleash human potential remains unparalleled, outlasting wars, social divisions, and geopolitical threats. Buying stock is a bet on America’s future and, as Buffett says, never bet against America.
- Time is an investor’s friend: We amended this principle just slightly. When he talks of time being a friend, he is referring to businesses. But time is exceedingly friendly to investors, as well.
Consider this obscure Warren Buffet fact. Over 90% of his current net worth was earned after the age of 60. In other words, the magic of compounded returns, which Albert Einstein called “the eight wonder of the world,” made Buffett a very wealthy man and it can work for any investor, regardless of their portfolio’s size.
These are very easy rules to follow, and when combined with an experienced financial advisor’s assistance, achieving financial security is within the reach of all Americans—even if not all will become billionaires.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.