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4 Investing Lessons You Can Learn From Warren Buffett

By James Brumley – Sep 15, 2020 at 6:15AM

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A slew of new investors as well as veterans have shrugged off much of Buffett's wisdom this fairly wild year.

He might be 90 years old, but the Oracle of Omaha's advice is still as relevant today as it was when he first dished it out. Ergo, investors would be wise to embrace the nuggets of wisdom that Warren Buffett has given us since he turned the textile company known as Berkshire Hathaway (BRK.A 2.29%) (BRK.B 2.38%) back in the 1960s into the diversified investment company we know and love today.

All of these tips are powerful, of course, but four of them may be more relevant in the current environment than they usually are.

1. Focus on the long term

It's always been sage advice, mostly because in an effort to produce big short-term gains, most investors end up doing themselves more harm than good.

Investing 101 written on a yellow legal pad

Image source: Getty Images.

See, taking advantage of short-term "swings" is predicated not so much on a company's results, but how other investors will feel about a stock at a point sometime in the foreseeable future. Guessing how a corporation will perform isn't necessarily easy, but guessing how people will be willing to overvalue or undervalue a name in the future is little more than a coin toss. People are fickle and fairly unpredictable. That's why it's been estimated between 80% and 90% of true day traders actually lose money.

Given enough time, however, long-term investors can largely count on investors collectively (at least occasionally) coming to their senses when it comes to a stock's price, and value it appropriately. It could just take years for this reality to play out.

2. Don't treat stock-picking like it's a pastime

Closely related to the first Buffett wisdom-nugget -- focusing on the long-term -- is remembering you shouldn't treat investing like a hobby. Such a mindset will eventually lead you to costly missteps. Most of the time, the best investment decision you can make is choosing to do nothing -- at least not right now.

It's a tip that's been particularly lost or overlooked this year. With the coronavirus pandemic effectively shutting down professional and college sports, sports junkies have turned to stock speculation to fill the void. Case in point: David Portnoy, the founder and chief of the often-controversial sports blog website Barstool Sports, has turned trading into a sport of sorts. He's led countless others into the fray with him, with many following his stock picks for themselves after he successfully plugged into a market-wide rally that's been lifting stocks since March.

Then, earlier this month, Portnoy reportedly lost $4 million in the blink of an eye, when technology stocks unexpectedly tanked.

That's not to suggest long-term investors didn't also suffer setbacks once the market started to unravel a rally that's been in place for months. But investors not seeking excitement or thrills probably would have been prepared for such a move, in the form of some profit-taking leading up to the turnaround.

3. Think for yourself

In that same vein, even investors not lured into the get-rich-quick hype of stock speculation may still be better off making their own decisions.

That's not to suggest an investor can't enlist the help of qualified experts (or newsletters like those published by The Motley Fool). These sources can generate investment ideas you may not have been able to find on your own, and can help you plan a complete portfolio or even navigate tricky tax matters. When all is said and done, though, there's nobody better equipped to pick stocks for a particular individual's portfolio than that individual. New and inexperienced investors may not always feel that way, but the fact is, this business doesn't require a great deal of intellect or experience. It requires a great deal of discipline and common sense. One just has to recognize the difference between hype and real potential.

4. Be fearful when others are greedy and greedy when others are fearful

Finally, while Warren Buffett has often said it, he wasn't the first to voice the idea. Benjamin Graham taught Buffett the realities of fear and greed, and Baron Rothschild is credited with the quip "the time to buy is when there's blood in the streets," which has been regularly circulated for well over a century. The underlying idea hasn't changed one iota, though. That is, people are most panicked at major market bottoms, and they're dangerously confident right before major market tops. (Just ask David Portnoy!)

Don't misread the message, as some investors might. On the surface it sounds like a suggestion to time entries and exits to market sentiment, or make contrarian trades right after major price moves. That's not quite what the Oracle of Omaha means; like short-term traders, market timers tend to do themselves a disservice simply because the market has a tendency to do the unexpected. Buffett's message is, don't let the environment, headlines, or other investors deter you from stepping into long-term plays when they're cheap, or cashing out of overvalued names when they're seemingly unstoppable. Extreme situations are usually short-lived.

Yes, the fear/greed advice is founded on elements of the previous three wisdom nuggets.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$410,704.98 (2.29%) $9,214.98
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
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