When the "Oracle of Omaha" speaks, it pays to listen.
Warren Buffett has been dishing out investing wisdom for decades. Most Americans -- and many investors -- haven't followed his advice, though. That's unfortunate, considering that the company Buffett runs, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), has seen its stock more than double the average annual gain of the S&P 500 since 1965 by adhering to his investing approach.
Every year, Warren Buffett writes a letter to Berkshire Hathaway shareholders, and each letter contains nuggets of investing advice. I looked at three of those letters -- one from 40 years ago, another from 10 years ago, and the most recent one -- to see what he wrote that could benefit regular investors who aren't worth billions. Here are three investing tips from Warren Buffett that you shouldn't ignore.
1. Buy stocks in the same way you'd buy an entire business
Four decades ago, Buffett told Berkshire shareholders that his philosophy was to "select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety." That's still great advice today.
In his letter written in March 1978, Buffett wrote that there were four characteristics he looked for when acquiring a business or buying a stock. First, he wanted to understand the business. Second, the business should have solid long-term prospects. Third, the company's management should be "honest and competent." And fourth, the business or stock should be "available at a very attractive price." Those continue to be the criteria Buffett uses, except that he has modified the last point a little and now states the price tag should be "sensible."
Following these rules on occasion has caused Buffett to miss out on big opportunities. He has admitted that there are some stocks that he should have bought years ago but didn't, notably including Google parent Alphabet and Amazon. Overall, though, using these guidelines for selecting stocks to buy has worked very well for Buffett.
2. Look for an enduring "moat"
Buffett has long advocated buying stocks of businesses with moats. Just as many castles in medieval times had moats filled with water to protect them from invaders, businesses can have the equivalents of moats today -- competitive advantages that keep rivals from taking away market share.
In his letter written to Berkshire shareholders in 2008, Buffett listed two examples of enduring moats: being a low-cost producer and "possessing a powerful worldwide brand." He cautioned, however, that "history is filled with 'Roman candles,' companies whose moats proved illusory and were soon crossed."
Enduring moats are harder to find than you might think. Buffett noted 10 years ago that his definition of "enduring" caused him to rule out buying stocks "in industries prone to rapid and continuous change." He also stressed that while companies should have great leadership, businesses shouldn't be overly dependent on a superstar CEO.
3. Avoid buying and selling too frequently
In his most recent letter to Berkshire shareholders, Buffett pointed out an important investing lesson: "Eschew activity." In other words, don't buy and sell stocks too frequently.
Buffett referenced a $1 million bet he made a little over 10 years ago. His wager was that an investment in an S&P 500 index fund would beat the returns of an actively managed portfolio over time. Asset management and advisory firm Protege Partners took Buffett up on that bet, investing in five "funds-of-funds" expected to generate better returns than the S&P 500. They didn't.
The good news is that one of Buffett's favorite charities, Girls Inc. of Omaha, won big-time. The initial money put up by Buffett and Protege Partners was moved from bonds into Berkshire Hathaway stock in November 2012. Thanks to this action, the final prize amounted to over $2.2 million instead of only $1 million.
Why did the actively managed portfolio lose to an index fund? Buffett pointed out that "during the 10-year bet, the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell decisions." There are times when you should sell a stock, but too much activity in and out of stocks nearly always costs you over the long run.
Success (almost) guaranteed
If you consistently follow these investing tips that Warren Buffett has given over the years, I think success is almost guaranteed. It's possible that the stocks you buy and hold according to these principles could be low achievers. But I think the odds are really good that your winners will more than make up for the losers.
And if you don't want to go along with Buffett's advice on buying stocks, probably the smartest thing to do is to still follow his example from that 10-year bet and put your money in an S&P 500 index fund. As Buffett noted in his last letter to shareholders, "in 100% of the 43 10-year periods since we took control of Berkshire, years with gains by the S&P 500 exceeded loss years." Like I said, success almost guaranteed.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.