Please ensure Javascript is enabled for purposes of website accessibility

12 Words From Warren Buffett That Can Mint You a Fortune

By John Maxfield – Oct 26, 2014 at 1:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This trenchant advice from Warren Buffett proves that successful investing is simple but not easy.

According to the world's best investor, Warren Buffett, the key to getting rich in the stock market can be summed up in 12 words: "Be fearful when others are greedy and greedy when others are fearful."

Given how straightforward this advice is, you may be surprised to learn that most investors aren't any good at buying and selling stocks. A recent analysis of investor returns revealed that over the past 20 years, the average investor underperformed the S&P 500 on an annual basis by 4.2%.

That may not sound like a lot in any single year, but project that over two decades and you're starting to talk about real money. Over the period examined, the S&P 500 returned a total of 543% compared with the average investor's 178%.

The problem is that we make decisions based on emotions. Quite to the contrary of Buffett's advice, we get greedy when stocks are soaring and pile into the market, but then stampede toward the exit after the market crashes. The vast majority of us, in other words, have a knack for buying stocks when they're high and selling them when they're low.

And to make things worse, it doesn't matter how many times we do this. We fail to learn our lesson. At the height of the Internet bubble in 2000, investors poured $315 billion into the market. Then, after stocks lost nearly 50% of their value, we liquidated our holdings and pulled $29 billion out. We then repeated the same pattern before and after the financial crisis of 2008-09, and we're in the process of doing so again.

This is why Buffett says the ability to control one's emotions is the single most important determinant of success in the stock market:

Success in investing doesn't correlate with IQ. Once you are above the level of 25, once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.

For someone like Buffett, a steady temperament that was tailor-made for investing seems to be genetically ingrained. Many of his biggest stock holdings at Berkshire Hathaway were accumulated when other investors were tripping over themselves to get out of the market.

He bought American Express in the mid-1960s after its share price was cut in half thanks to the Salad Oil Scandal. He purchased shares of Wells Fargo when a real estate crash in the early 1990s led other investors to question its solvency. And he poured billions of dollars into both Goldman Sachs and Bank of America at the depths of the latest crisis.

The question, in turn, is this: How can you steel your own emotions so that you, too, can be greedy when others are fearful and fearful when others are greedy?

The answer is twofold. First, it's important to appreciate that volatility is a frequent and inherent quality of the stock market. As my colleague Morgan Housel points out, the S&P 500 has declined by at least 10% from a recent high 89 times since 1928. That equates to about once every 11 months.

And second, you need to have a plan and resources -- namely, cash -- at your disposal to employ when stocks fall. What sector will you focus on? What stocks will you buy? Not only will answering these questions give you a roadmap to use when the inevitable happens, but the process of doing so will itself also help to temper your emotions.

At the end of the day, successful investing is simple but not easy. You don't have to be a genius. You don't have to immerse yourself in reams of financial statements. You don't have to follow the market on an hourly or even a daily basis. But you do have to recognize your own shortcomings and develop a strategy that neutralizes their impact on your portfolio.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends American Express, Bank of America, Berkshire Hathaway, Goldman Sachs, and Wells Fargo and owns shares of Bank of America, Berkshire Hathaway, and Wells Fargo. We Fools don't 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
$315.13 (0.59%) $1.86
Goldman Sachs Stock Quote
Goldman Sachs
$383.71 (0.35%) $1.35
Bank of America Stock Quote
Bank of America
$37.00 (0.38%) $0.14
Wells Fargo Stock Quote
Wells Fargo
$47.57 (1.26%) $0.59
American Express Stock Quote
American Express
$154.42 (2.35%) $3.55

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.