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The Greatest Warren Buffett Lesson I Ever Learned

Photo credit: Georgetown University

Warren Buffett, the legendary CEO of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , is known for a lot of things -- uncanny stock picking, fearless leadership, and of course, timeless wisdom.

Giddy investors around the world rejoice the day his annual letter to Berkshire Hathaway shareholders is released. The 2013 version of this letter is only weeks away.

With that in mind, we asked four of our top contributors and Buffett-aficionados to share the great lesson they've learned from the Oracle of Ohama.

Jordan Wathen: Of Warren Buffett's many insightful quotes, these 11 words had the most impact on my investing:

"You are better off in businesses that are not capital intensive."

It's such a simple idea, but one many investors fail to grasp -- the businesses that will compound your money the fastest are those that require very little investment at all.

At their core, CSX and MasterCard are very similar. CSX moves freight; MasterCard moves data. Both have a very wide moat -- it would be hard to compete with them today.

But when it comes to returns, MasterCard obliterates CSX. CSX reinvests roughly two-thirds of its operating cash flow to replace and build new rails. MasterCard reinvests roughly 6% of its operating cash flow to maintain and build its network.

In the long-run, a stock's return will follow the returns a company earns investing in its business. The best returns will never come from capital-intensive companies that starve for more cash; high returns come from companies that can grow with very minimal reinvestment -- capital-light businesses like MasterCard.

Jessica Alling: "Wide diversification is only required when investors do not understand what they are doing."

Photo credit: Georgetown University

There's no denying diversification will statistically decrease your portfolio's risk profile, but Buffett's statement takes a jab at the notion of diversification for diversification's sake. Stocking your portfolio with 10 great companies is smarter than 100 stocks picked solely for the purpose spreading your risk a little thinner over the market.

The Berkshire Hathaway portfolio has a clear trend of high concentration in a select number of stocks. The company's largest holding is in Wells Fargo -- over 463 million shares – dominating 20% of the company's portfolio as of the third quarter 2013. By concentrating on only a few companies that match his investment doctrine, Buffett and his investing team aren't concerned about diversifying to avoid risk.

Quoting actress Mae West, Buffett has said, "Too much of a good thing can be wonderful."

Alexander MacLennan: "A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776."

Many investors and analysts alike will hesitate because they believe the future is uncertain. But the future is always uncertain and we accept this reality in virtually every other aspect of life. Since uncertainty exists at all times, using its presence as an excuse not to invest could keep you out of the market forever.

Making this excuse even more damaging is that our perceived levels of uncertainty usually are at their lowest at market peaks (when stocks are overvalued) and at their highest at the bottom of the market (when stocks are bargain priced).

Bottom line: Unless you can predict the future, there will always be uncertainty. Don't let it stop you from making investment decisions.

Patrick Morris: The greatest lesson I've learned from Buffett is one he learned from mentor Ben Graham: "Price is what you pay; value is what you get."

All too often we can think investing is only a matter of finding stocks trading at great prices relative to peers, and therefore investing in them. But that's the obvious side of the equation. Understanding the true value of a business is much more important.

Take Buffett's bank investments Wells Fargo and US Bancorp, which are actually some of the most "expensive," bank stocks out there. Yet the two have avoided the troubles which characterized banks, and continuously delivered remarkable returns to their investors. Current price is an essential consideration, but the company's true underlying value should be the ultimate driver.

Plenty more Buffett wisdom to help you build wealth
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2014, at 2:53 PM, TXObjectivist75 wrote:

    Don't forget: "Vote Democrat!"

  • Report this Comment On February 18, 2014, at 5:01 PM, JamesBrown wrote:

    I recall one bonmot where Buffett was chiding those CEOs who engage in foolish mergers & acquisitions largely on the advice of their investment bankers:

    "Don't ask the barber if you need a haircut."

  • Report this Comment On July 26, 2014, at 10:42 PM, PEStudent wrote:

    " MasterCard obliterates CSX"

    On Feb 15, 2014 when this article was published:

    MA: $77.39

    CSX: $27.53

    Today, July 26, 2014:

    MA: $75.75

    CSX: $31.00

    Mastercard's :obliterating" change: -2.1%

    CSX's "capital-intensive" change: +12.6%

    MA's annual dividend yield: 0.4%

    CSX's annual dividend yield: 2.1%

    Note that Buffett bought a railroad, BNSF. His remark on capital intensity depends on the durable competitive advantages. It's very hard to duplicate railroads without a much higher expenditure in costs than large, in-place railroad equipment expend to maintain what they have.

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