Warren Buffett has made billions in the stock market. And while his investing experience is unmatched, many of his tactics are simple enough for novice investors to adopt.
Read on for five Buffett quotes that outline key elements of his buy-and-hold investment approach. Use his advice to minimize ugly investing surprises and maximize long-term returns.
1. Be wary of the easy win
Buffett said, "Speculation is most dangerous when it looks easiest."
Buffett made this comment in reference to bubbles -- or periods when investors are buying enthusiastically, almost recklessly. As a result, share prices can rise so quickly that it creates a "can't-lose" dynamic. That drives more enthusiasm, which generates more gains.
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In these moments, making money in the stock market can seem easy. Just invest in nearly any stock and you're likely to see a quick gain.
Unfortunately, these are also the moments when the tide can turn very quickly. If stocks rise to the point of being overvalued, a big correction may follow.
The lesson for novice investors? Avoid the "can't-lose" mindset. Make thoughtful, researched investment decisions. And be cautious when investor enthusiasm starts to feel more influential than actual business results.
2. Stick to your circle of competence
Buffett said, "Know your circle of competence, and stick within it."
This is another way of saying invest in what you know. When you understand a company's competitive advantage and business model, you'll do a better job evaluating that stock's potential.
For example, if you drop into Starbucks weekly for a venti latte, you know (from a customer perspective) what makes this coffee brand successful. As a result, you can more easily identify threats and assess the company's growth plans.
Your insight as a customer or industry insider is valuable. Use it to your portfolio's advantage.
3. Plan on holding forever
Buffett said, "Our favorite holding period is forever."
Buffett prefers buying stocks he can hold indefinitely. These are stocks with solid balance sheets, relatively predictable profits, and lasting competitive advantages.
Buying stocks to hold is safer and more reliable than buying stocks to sell. If you intend to hold a stock long term, you don't have to change your plans when temporary conditions push the stock price down.
If you buy a stock with the intention of selling it, an unexpected downturn does upset your plan. You'll end up with two unpleasant options. You can sell the stock for less than you'd expected. Or you can leave your capital tied up in a stock you never intended to keep.
Sidestep that scenario by investing in stocks with long-term potential.
4. Don't bet against America
Buffett said, "For 240 years, it's been a terrible mistake to bet against America, and now is no time to start."
Buffett is unapologetically bullish on American business long term even when other experts may be predicting economic tragedy. To be clear, Buffett knows economic downturns happen. But he also knows those downturns will be temporary. He has faith that the economy and stock market will always recover. And, importantly, he knows the growth in those recovery phases will more than offset losses incurred in the downturns.
That mindset can keep you invested even when it seems like everyone else is selling. After all, why sell a stock for $50 today if you know it'll be worth far more later?
5. Fear is your friend
Buffett said, "First, widespread fear is your friend as an investor, because it serves up bargain purchases."
There are two components to investment profits -- your buy price and your sell price. While many investors focus on the sell price, Buffett does the opposite. He relishes in stock market downturns because they lower his buy prices. That's why you'll often see him increase his buying activity when the market is down.
As a novice investor, you may not want to invest more when the market is shaky. That's understandable -- you don't have the resources Buffett has. But you might think twice before pausing your investing activity just because share prices are weak. You'd miss out on those bargain purchases that deliver more shares for each invested dollar.
Buy and hold what you know
Steer clear of speculation, especially when it's most tempting. Buy and hold stocks you know. And don't stop investing when the market is down. Implementing these Buffett concepts can lower your risk and improve your bottom line -- which is about the best combination of outcomes an investor could ask for.
