When it comes to great investors, they don't get much better than Warren Buffett. Through shrewd investments in stocks and entire companies that he bought, Buffett has grown his Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) company's per-share book value by an annual average of 19.7% between 1965 and 2012. That's a total gain of more than 586,000%. The company's stock has grown by about about million percent since 1965, enough to turn a $10,000 investment into roughly $100 million. So we can agree that the guy knows a thing or two about investing, right? Thus, it would be smart to heed his investment advice. Let's a look at some of his nuggets of wisdom.
"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts, the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
This bit of investment advice offers useful perspective, reminding us that the market's overall trend has been to rise, despite some big and small hiccups.
Geniuses need not apply
It can be easy to assume that you need to be brilliant like Buffett to make money in stocks. He would disagree, though:
"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."
That point is supported by plenty of examples of the bumbling of brilliant folks, such as the 1994 implosion of the massive Long Term Capital Management hedge fund company, which boasted two Nobel laureates and lost billions anyway.
Investing is simple ... sort of
So what specific investment advice does Buffett offer? Here it is, in a nutshell:
That sure makes it sound easy. Note, though, that his investment advice isn't to simply buy and hold forever. You should hang on only as long as a company remains promising. Here's a little more detail:
"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: 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."
That investment advice contains some key concepts -- for instance, making sure to buy at attractive prices, and focusing on companies that are easy for you to understand.
It's not all simple, though:
"When managers want to get across the facts of the business to you, it can be done within the rules of accounting. Unfortunately, when they want to play games, at least in some industries, it can also be done within the rules of accounting. If you can't recognize the differences, you shouldn't be in the [stock]-picking business."
The main message here is that it's important to keep reading and learning, so you can become a better investor. (If you don't have the time or interest for that, Buffett has recommended simple index funds, as we at the Fool have also recommended for many years, too.)
Another key bit of investment advice from Buffett is to maintain a long-term view:
"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
Indeed, Buffett has held shares in some companies for decades. This quotation is from his 1988 letter to shareholders, and in that letter he lists stock in Coca-Cola and Washington Post as major holdings, and he still has his shares.
The investment advice to be patient and calm has been reiterated many times. For example:
"You could be somewhere where the mail was delayed three weeks and do just fine investing."
Don't get emotional
Another vital piece of investment advice is to avoid being influenced by dangerous emotions:
"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."
This makes a lot of sense if you think about it: Others tend to be greedy when the market has been soaring, so they often end up buying at inflated prices. Folks get fearful and often sell after big market drops, but by doing so they lose money (or reap smaller gains) and miss out on some great buying opportunities.
Be careful whom you listen to
Finally, an often overlooked bit of investment advice is to be careful where you gather your investment advice:
"Never ask the barber if you need a haircut."
If you're getting stock-investing guidance from a broker, he or she may have some conflicts of interest and not have your best interests at heart.
There's much more to learn from Buffett. You might start with his many annual letters to shareholders, which are quite accessible -- and often even entertaining.