One great way to learn the basics of investing is by studying the greatest buy-and-hold investor of all time, Warren Buffett. Here are 10 of the Oracle of Omaha's famous quotes that could translate into investing success for you and might prevent you from making mistakes.
1. "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."
You may have heard the expression "don't throw good money after bad," and this is the point of what Buffett is saying here. If you own a stock that's gone down and your original reasons for buying it no longer apply -- get out. It's a common mistake to attempt to "average down" on losing positions. Instead, you're better off cutting your losses and finding a better way to use that money.
On the other hand, if a stock you own has gone down for no other reason than general market or sector weakness, but the business is as strong as ever, that's the time to double down.
2. "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
In other words, don't hesitate when you see a great opportunity. In the aftermath of the financial crisis, Buffett didn't simply tiptoe into bank stocks. Rather, he made multibillion-dollar investments in Bank of America and Goldman Sachs that have paid off tremendously.
3. "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."
I like to apply what I call the "30-year test" to most of the stocks I consider for my own portfolio. I ask myself if the business will be around in 30 years, and if the company has a clear competitive advantage that should allow it to maintain or grow its market share and profitability during those 30 years. If the answer to either question is "no," or "I'm not sure," I move on.
4. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Cheap garbage is still garbage. Radio Shack was trading for a ridiculously low valuation a couple of years back -- but that's because it had serious problems, eventually leading to bankruptcy. Instead, a better idea would be to compare rock-solid retailers such as Wal-Mart, Target, and Costco to see which is trading for the best price.
5. "Our favorite holding period is forever."
There are plenty of valid reasons to sell stocks. For example, if a company's business strategy changes, its growth or profitability declines, or if you simply need the money, it can be in your best interest to sell a stock. In fact, Buffett-led Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) sells stocks regularly, and for a variety of reasons. However, Buffett's point is that you should go into every stock investment with the intention of holding it forever.
6. "Only when the tide goes out do you discover who's been swimming naked."
Anybody can make money in a rising market. We've been in a bull market for seven years now, so if someone brags about how much his or her portfolio has risen since 2009, take it with a grain of salt.
On the other hand, it takes real talent and discipline to consistently do well in falling markets. Since 1965, the S&P has finished the year in the red 11 times. In those 11 years, Berkshire has beaten the market in all but two of them.
7. "Never invest in a business you cannot understand."
Buffett doesn't understand tech stocks well, so they're mostly absent from Berkshire's portfolio. I don't have a particularly good grasp on the biotech industry, so I'm not going to invest in it.
Before you buy any stock, you should have a thorough understanding of how the business makes its money, and how it expects to continue to make money going forward. Getting into a stock you don't fully understand is a recipe for disaster.
8. "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
As a classic value investor, Buffett looks for stocks trading below their intrinsic value. While there are many different methods for determining whether a stock is on sale, here's a quick guide to value investing that can help you get started.
9. "Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1."
Perhaps the most famous Buffett quote of all, it's actually one of the most inaccurate -- at least in the literal sense. Buffett will be the first to admit that he's made a few bad investments over the years, and no investor will be right 100% of the time.
Instead, the point is that protecting your principal from losses should be a higher priority than making money. Berkshire Hathaway has produced a 50-year return of nearly 1,600,000% for its shareholders, even though it often underperforms the S&P in years when the market rises quickly. The real trick to long-term success is to outperform during the bad times.
10. On buying individual stocks: "If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds."
The bottom line is that investing in stocks the right way requires time. You'll need to do your homework and research and compare stocks before investing, make sure your profile is properly diversified, and monitor your stocks on a regular basis. If you're not willing to do that, there's absolutely nothing wrong with buying a low-cost S&P 500 index fund, which Buffett has said is the best investment most people can make. Not only does this method do all of the hard work for you, but history has also shown that you'll probably beat the majority of mutual funds over the long run.
Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.