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The Greatest Warren Buffett Lesson I Ever Learned

By Motley Fool Staff – Feb 15, 2014 at 1:31PM

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Warren Buffett made billions investing. Here's are the lessons everyone should know.

Photo credit: Georgetown University

Warren Buffett, the legendary CEO of Berkshire Hathaway (BRK.A 0.66%) (BRK.B 0.59%), is known for a lot of things -- uncanny stock picking, fearless leadership, and of course, timeless wisdom.

Giddy investors around the world rejoice the day his annual letter to Berkshire Hathaway shareholders is released. The 2013 version of this letter is only weeks away.

With that in mind, we asked four of our top contributors and Buffett-aficionados to share the great lesson they've learned from the Oracle of Ohama.

Jordan Wathen: Of Warren Buffett's many insightful quotes, these 11 words had the most impact on my investing:

"You are better off in businesses that are not capital intensive."

It's such a simple idea, but one many investors fail to grasp -- the businesses that will compound your money the fastest are those that require very little investment at all.

At their core, CSX and MasterCard are very similar. CSX moves freight; MasterCard moves data. Both have a very wide moat -- it would be hard to compete with them today.

But when it comes to returns, MasterCard obliterates CSX. CSX reinvests roughly two-thirds of its operating cash flow to replace and build new rails. MasterCard reinvests roughly 6% of its operating cash flow to maintain and build its network.

In the long-run, a stock's return will follow the returns a company earns investing in its business. The best returns will never come from capital-intensive companies that starve for more cash; high returns come from companies that can grow with very minimal reinvestment -- capital-light businesses like MasterCard.

Jessica Alling: "Wide diversification is only required when investors do not understand what they are doing."

Photo credit: Georgetown University

There's no denying diversification will statistically decrease your portfolio's risk profile, but Buffett's statement takes a jab at the notion of diversification for diversification's sake. Stocking your portfolio with 10 great companies is smarter than 100 stocks picked solely for the purpose spreading your risk a little thinner over the market.

The Berkshire Hathaway portfolio has a clear trend of high concentration in a select number of stocks. The company's largest holding is in Wells Fargo -- over 463 million shares – dominating 20% of the company's portfolio as of the third quarter 2013. By concentrating on only a few companies that match his investment doctrine, Buffett and his investing team aren't concerned about diversifying to avoid risk.

Quoting actress Mae West, Buffett has said, "Too much of a good thing can be wonderful."

Alexander MacLennan: "A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776."

Many investors and analysts alike will hesitate because they believe the future is uncertain. But the future is always uncertain and we accept this reality in virtually every other aspect of life. Since uncertainty exists at all times, using its presence as an excuse not to invest could keep you out of the market forever.

Making this excuse even more damaging is that our perceived levels of uncertainty usually are at their lowest at market peaks (when stocks are overvalued) and at their highest at the bottom of the market (when stocks are bargain priced).

Bottom line: Unless you can predict the future, there will always be uncertainty. Don't let it stop you from making investment decisions.

Patrick Morris: The greatest lesson I've learned from Buffett is one he learned from mentor Ben Graham: "Price is what you pay; value is what you get."

All too often we can think investing is only a matter of finding stocks trading at great prices relative to peers, and therefore investing in them. But that's the obvious side of the equation. Understanding the true value of a business is much more important.

Take Buffett's bank investments Wells Fargo and US Bancorp, which are actually some of the most "expensive," bank stocks out there. Yet the two have avoided the troubles which characterized banks, and continuously delivered remarkable returns to their investors. Current price is an essential consideration, but the company's true underlying value should be the ultimate driver.

Alexander MacLennan has no position in any stocks mentioned. Jessica Alling has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. Patrick Morris owns shares of Berkshire Hathaway and US Bancorp. The Motley Fool recommends Berkshire Hathaway, MasterCard, and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway, CSX, MasterCard, and Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
$475,843.00 (0.66%) $3,130.99
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
$315.13 (0.59%) $1.86
Wells Fargo Stock Quote
Wells Fargo
$47.57 (1.26%) $0.59
Mastercard Stock Quote
$343.13 (-0.42%) $-1.46
US Bancorp Stock Quote
US Bancorp
$44.59 (1.94%) $0.85
CSX Stock Quote
$32.17 (1.80%) $0.57

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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