Warren Buffett's Brand-New Advice on How to Get Rich

Two small investments Warren Buffett made more than two decades ago can teach us all something about how we should view our money.

Each year, investors anxiously await the annual report from Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , which contains a letter from Warren Buffett that contains indispensable insight into the decisions he's made both over the last year and his entire life.

While his letter for 2013 has yet to be released in its entirety, Fortune Magazine recently obtained an excerpt where Buffett outlines how two small real estate investments he made more than 20 years ago forever shaped his view on investing, but can prepare everyone for a future of success.

Source: Richard Hurd on Flickr.

The investments
Buffett describes his purchase of a 400-acre farm 50 miles north of Omaha, Neb., in 1986. Just a few years prior, farmland in Nebraska and the entire Midwest was booming, but a bursting of the bubble caused prices to decline rapidly. Buffett was able to buy the land for $280,000, which was "considerably less" than what a failed bank valued it a few years earlier.

While Buffett notes he "knew nothing about operating a farm," he enlisted the help of a son -- who was an avid farmer himself -- and the two estimated the return on the investment would be 10% annually.

He then describes the purchase of a "small investment" -- the price wasn't mentioned -- of a retail property in New York City that was next to New York University in 1993. He joined two other friends to buy the property following the collapse of the commercial real estate bubble and once again estimated he could earn about 10% each year.

Source: Insider Monkey.

As typical with Buffett, he is somewhat muted on what he has actually made from the initial investments, but notes, "The farm has tripled its earnings and is worth five times or more what I paid," and he now receives 35% of his initial investment in the real estate property annual in the form of distributions. 

Although the investments were small -- Berkshire Hathaway had a book value of more than $2 billion in 1986 and almost $9 billion in 1993 -- and he has never seen the property in New York and the farmland only twice, Buffett notes that "the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."

The lessons
First, Buffett says, "You don't need to be an expert in order to achieve satisfactory investment returns," and a recognition of personal limits while ensuring things are kept simple navigating along a "course certain to work reasonably well" is critical.

He adds that when an investment decision is made, it's always critical to evaluate "future productivity" to determine if it's a worthwhile investment. If an investor is unable to gauge a "rough estimate" of what the future return of the investment is, Buffett says the best step is to simply "forget it and move on."

Source: Coca-Cola.

Buffett continues by highlighting that he focuses on productivity, not price, which is a critical distinction. Often investors are lulled into thinking it's only the price that matters, but prices are merely speculations of a value, whereas the productivity of a business is where the actual value is created.

The final lesson Buffett extols from these two small investments is that he didn't consider the broader macroeconomic or market predictions from others because those "may blur your vision of the facts that are truly important."

Next, he says speculation surrounding future price and daily prices are superfluous when making a decision. Again, he harps on the truth that he "thought only of what the properties would produce and cared not at all about their daily valuations."

Changing your life
In all five points, Buffett highlights things that can be taught to all investors, both those in real estate and those preparing for retirement through the stock market.

Investments are to be made in businesses that generate returns to their investors, not simply the names and numbers of stock tickers.

While it is easy to be swayed by daily trends, long-term investments at reasonable prices are always a winning formula. And if that sounds too daunting or difficult, Buffett says a very low-cost index fund is a wonderful solution.

Buffett concludes by reminding readers of his oft-repeated but immensely valuable advice he learned from his professor and mentor Ben Graham: "Price is what you pay; value is what you get," which is something everyone must remember when making any investment.

More wisdom from Warren
While its value is seemingly infinite, the price of Warren Buffett's wisdom is thankfully free. He is one of the greatest investors ever and through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway worth billions. If you want more from Buffett, now you can tap into the best of his wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Read/Post Comments (21) | Recommend This Article (110)

Comments from our Foolish Readers

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  • Report this Comment On February 25, 2014, at 6:23 PM, MikeinDenver wrote:

    This advice seems to be lost in todays world. Our markets are far less about investing and far more about timing and gaming.

  • Report this Comment On February 25, 2014, at 8:22 PM, GodLeros wrote:

    RE: MikeinDenver

    Agreed!

    I do both! It keeps me satiated.

    One fourth of my Investment Money I 'time and game.' The rest I am strict and careful with. No cheating. It keeps me satiated. It is like low-carb dieting with a cheat day.

  • Report this Comment On February 25, 2014, at 10:00 PM, GrumpyOldGuy wrote:

    WBs advice should read "Start young, work hard, and if you ever get an advantage over someone, stick the knife in and twist it."

    The man makes old time pirates look good by comparison.

  • Report this Comment On February 25, 2014, at 11:24 PM, kankemike wrote:

    Learn from your mistakes. Still the best advice I've ever been given.

  • Report this Comment On February 26, 2014, at 7:35 AM, wvowell wrote:

    Wow, buying farmland at $700 an acre!!! And then let the government force ethanol down our throats and boom -- farmland is now $3500 an acre.

    Good thing the government is there to lend a helping hand.

    Buffet is brilliant!!! Buy value and get insider information and you will be rich, rich, rich!!!

    He lacks a little specifics on the no brainer, brilliant real estate move he made.

    It's nice that he has very little income every year but a lot of distributions, capital gains, etc. Oh gee this is why is secretary pays a higher tax rate than he does.

  • Report this Comment On February 26, 2014, at 9:59 AM, mayaerhard wrote:

    I think his advice is great. However, he buys property worth $700 dollars an acre, fine. But I would like to have some advice on how we, who don't have that kind of money, can do something that is not so expensive. Almost no one can afford his advice, unless you have money to spare.

  • Report this Comment On February 26, 2014, at 11:42 AM, Ledge wrote:

    I love when investment advice includes the gem "buy at an undervalued price". No kidding. Well I have bought a bunch of marijuana based stocks because I think their potential value is being way undervalued. If I am right I will be a genius...if not I am will be an idiot who invested in a stupid long-shot. Funny how it all turns on chance most of the time.

  • Report this Comment On February 26, 2014, at 3:29 PM, DelJames1 wrote:

    Why has the Warren Buffett stock stayed so low in the market when he has been so successful with his investments.

  • Report this Comment On February 27, 2014, at 5:15 PM, truman1987 wrote:

    What is up with these comments? The advice isn't to buy farmland. The advice isn't to try to guess if something is undervalued. He actually says to not focus on the price. The advice is to look at what your investment will produce. Of course if your investment is going to produce 10% profit, then it will probably turn out that you buying at a good value. It doesn't matter if you are investing $100 or a million dollars. Same analysis applies.

    Pirates? Insider information? Lots of other sites out there for people with nothing to say. Let's keep the Fool focused on investing.

  • Report this Comment On February 28, 2014, at 11:34 AM, bradklyn wrote:

    ditto truman1987

  • Report this Comment On February 28, 2014, at 12:08 PM, cooncreekcrawler wrote:

    If your sole focus is "getting rich" you are most likely on the wrong trail. Rich is nice, but there are other necessary things.

  • Report this Comment On February 28, 2014, at 12:42 PM, Hfish1212 wrote:

    He mentions not having to be an expert, but then he uses a his son who knew a little, and was able to correctly estimate annual revenues of that farm. I would call that being an expert.

  • Report this Comment On February 28, 2014, at 1:10 PM, gorlickg wrote:

    Buffett bought the farmland because son Howie needed help. IMHO based on his biographies. He would not have bought it if Howie was of the nature of his brother or his sister.

  • Report this Comment On February 28, 2014, at 2:06 PM, cmalek wrote:

    "The advice is to look at what your investment will produce."

    Truman1987,

    I'm glad you and Warren have a crystal ball or a time machine and know ahead of time what an investment will produce. For us mere mortals it is still a crapshoot. As the saying goes, "You pays your money and you takes your chances."

  • Report this Comment On February 28, 2014, at 3:50 PM, L8starter wrote:

    A lot of weird, misdirected anger and resentment in these comments.

    cmalek, you don't need a crystal ball if you're willing to do some research before buying a stock. It's only people who are impatiently looking to pile all their savings into the next get-rich-quick tip who have to worry about clairvoyance. Look at a couple 10-Ks and listen to the execs answer analysts' questions on an earnings call or two, and you'll have all the "insider" information you need to make money like the rest of us mere mortals who are doing it.

  • Report this Comment On March 01, 2014, at 1:34 PM, redwooddancer wrote:

    I second L8starter's and others notes about strange comments...but here's what the negative commentators are overlooking: while I don't have the connections of Mr WB and cannot ever get as good a price on any company, I CAN follow WB's basic advice to buy great companies at a reasonable price. I CAN spend my time in both learning about finance & investing and researching great companies bought at a reasonable price, all online and easily accessible these days (and mostly, even entirely, free). It's no quick-get-rich idea, it's a slow-get-comfortable idea. I won't likely ever have the return WB does, but I do have a long-term positive return that beats inflation and the indexes. And for the record, I am working and making in a year probably less than many of you on this site make in a month (just guessing, obviously) and I didn't start my financial education until later in life. I haven't had the opportunity of a formal education and I still do without many things most people think they "need", but am in a much better financial place now than ever in my life, due in part to this site. Bottomline: These opportunities are available if you want them enough.

  • Report this Comment On March 01, 2014, at 5:52 PM, fredo5697 wrote:

    "It's nice that he has very little income every year but a lot of distributions, capital gains, etc. Oh gee this is why is secretary pays a higher tax rate than he does."

    wvowell - If he didn't play the game that the IRS has set up, he would be an idiot. Let us know when you volunteer to pay more taxes than you are required to.

  • Report this Comment On March 02, 2014, at 1:37 AM, lowmaple wrote:

    Buffett bashers l have to agree with the 3 comments above. WE here have our own experts helping us with our investments and we too should be waiting for market corrections to buy at least some of our positions.......As far as taxes voters do have a say if they really want to change the system.

  • Report this Comment On March 02, 2014, at 7:52 AM, cbuffool wrote:

    Warren's comment that he "cared not at all about their daily valuations" doesn't follow from the two stories he cites. In each case, he bought after the bursting of some valuation bubble, and I doubt anyone can resist being influenced by an earlier, higher valuation. I'd be more convinced if he'd singled out a .com at the height of the bubble that was "productive" and made a killing on it (Amazon, perhaps? Was it productive back then? It certainly doesn't produce much in profits today!)

  • Report this Comment On March 06, 2014, at 6:58 PM, JackHoff wrote:

    It may have worked for Buffet but it didn't work for me. I bought a farm and my brother was screwing all of the sheep. The sheep ended up croaking and I lost the farm.

    The moral of the story is if you have a horny brother you could end up "losing the farm".

  • Report this Comment On March 26, 2014, at 7:25 PM, jstewart wrote:

    Buffet should take that farm and turn it into a medcinal marijuanna farm.

    To the guy who claim his bro did the sheep. Were you just standing by and watching or holding them still? Baaaaaaad

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