5 Things You Should Learn From Warren Buffett

If you follow Warren Buffett's investing principles, you are likely to have a good shot at materially improving your long-term investment returns.

Aug 25, 2014 at 8:00AM


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There is a reason Warren Buffett has pushed Berkshire Hathaway's market capitalization to approximately $324 billion over the last couple of decades. In addition, Buffett has become one of the wealthiest men with a net worth estimate of around $66 billion, according to Forbes.

But why is it that despite the fairly simple-to-follow investment guidance of Buffett, many investors are far from achieving the success Warren Buffett has?

A lot of it has to do with how the serious job of researching and investing is portrayed in the media as well as how our culture focuses on short-term trading instead of accentuating patience and sound investing principles. While both Warren Buffett and Charlie Munger, vice chairman of Berkshire Hathaway, advocate long-term investing, our society glorifies making fast money, preferably without any material effort.

The Buffett route to investing, though, appears to be more promising. If you apply these five key principles of Warren Buffett to your investing, you are already way ahead of the pack and may be even on the road to some serious money.

1. Buffett wants to be an owner
If you see yourself as an owner of a business instead of an unattached speculator, your thinking changes dramatically. Activity and volatility in the stock market are often driven by speculators who employ short-term trading strategies (including high-frequency trading from professional money managers).

It is part of the human condition that we want to be rewarded quickly. Buffett, on the other hand, excels at dismissing this natural urge and invests solely for the long term. His favorite investment holding period: forever.

2. Buffett buys at the right time
One of the best Buffett quotes, in my opinion, is: "Be fearful when others are greedy and greedy when others are fearful."

Buffett famously stays away from the crowd and often buys companies and stocks when nobody else would. Somehow, he mostly ends up on the right side of things. His stock and option purchases of Goldman Sachs and Bank of America at the height of the financial crisis certainly fall into this category.

3. Buffett stays away from activity
Do you ever ask yourself why there are so few Warren Buffetts in this world (investors who endorse value investing, religiously take advantage of compounding, and hold on to their investments for a long, long time)?

It's because most investors are actually not investors at all, they are speculators.

Speculators are inherently on the lookout for momentum and a short-term trade to make some quick cash. Buffett stays away from anything that "stimulates activity."

4. Buffett bets big on America
He believes in capitalism and America and famously said: "America's best days lie ahead."

Buffett wants to invest when stocks are on sale, and as such, it is not really surprising that Buffett endorsed America in a time of extraordinary distress during the financial crisis. He sees long-term growth opportunities in the United States, invests when others are scared, and remains unaffected by short-term economic weakness.

5. Buffett believes in the magic of compounding
"My wealth has come from a combination of living in America, some lucky genes, and compound interest."

This pretty much says it all: Compound interest is the way to make a long-term fortune. Investors can learn a lot from this simple investing wisdom: Make sure you reinvest as much of your dividends and bond income as you possibly can. Over the long term, compounding will work its magic.

The Foolish bottom line
If you really think about it, Warren Buffett's success principles are not that difficult to apply -- if you are aware of your shortcomings.

The biggest advantage you can gain over others is to think like an owner who wants to hold an investment forever. This likely dramatically cuts down your investment options, too, as there aren't so many top-quality companies going around.

Also, make sure you don't buy stocks when everybody else does. Buy them when they are cheap and nobody wants them.

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