Warren Buffett is one of the greatest stock investors of all time, but many of his methods for choosing stocks -- and his philosophies about investing in general -- aren't nearly as complex as you might think. Conveniently for those of us who lack his singular genius, Buffett eagerly shares valuable pieces of his investing wisdom through his widely read letters to Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) shareholders and frequent TV interviews.
Here are three of the most important and valuable lessons that he has shared -- ideas that could dramatically improve your investing results.
1. Focus on the long term
Far too often, I get asked questions to the effect of "Do you think airline stocks will double this month?" or "What do you think the market will do next week?" If you buy and sell stocks based on what you think will happen tomorrow, next week, or next month, you aren't investing -- you're speculating. And that's just a fancy finance word for "gambling."
One of the best Buffett lessons for newer investors to learn is that the most effective way to build wealth by investing in stocks is to focus on the long term and largely ignore short-term market movements. As Buffett says, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
2. Don't be afraid to sell bad investments -- even at a loss
One of my favorite Buffett quotes has to do with selling stocks: "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be a more productive than energy devoted to patching leaks."
In other words, don't keep good money committed to bad investments.
Buffett may be a big fan of holding investments for the long haul, but he is also excellent at getting out of them once the reasons he bought in no longer apply. For example, IBM (NYSE:IBM) used to be one of Berkshire Hathaway's largest stock holdings. However, over the years that followed that investment, the competitive landscape changed in the industry and Buffett realized the company wasn't worth what he thought it was. So, he was quick to exit.
More recent examples can be found in the airline stocks Buffett bought a couple of years ago, and abruptly sold once the COVID-19 pandemic severely disrupted the business of air travel. There could certainly be long-term value in some of these companies, but the simple reality is that the reasons Buffett bought their stocks no longer apply, and the airlines now face an uphill battle.
3. Don't pay attention to the hype and market noise
"Don't get caught up with what other people are doing," Buffett has said. "Being a contrarian isn't the key, but being a crowd follower isn't either. You need to detach yourself emotionally."
Most of the stocks in Berkshire's portfolio -- especially those that have produced the best long-term gains like Coca Cola (NYSE:KO) and American Express (NYSE:AXP) -- are what many investors would consider to be boring.
Buffett has made a career of not chasing the next big thing. But he also doesn't necessarily go against the crowd. He hasn't invested in most trendy tech stocks, but he hasn't exactly bet against them either. Instead, he does his own thing -- finds businesses that he understands and believes are worth more than the market thinks, buys shares, and holds them for long periods.
So don't invest because someone on TV or in an online forum says a stock is about to double. Don't buy marijuana stocks or COVID-19 vaccine stocks because they get lots of media coverage. Instead, do your own research, and then invest in the companies that you find to be the best value.
As Buffett puts it, "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." (Note: Take a little time to read our short primer on how to research stocks, much of which is based on Buffett's methods and advice.)
A lifetime of investing wisdom
Admittedly, it was difficult to narrow Buffett's many decades of investing lessons down to just three. During the 56 years he's been in control of Berkshire Hathaway, he hasn't been shy about sharing his investing philosophies, and there's a tremendous amount of valuable wisdom investors can acquire from listening to the Oracle of Omaha.