A few months ago, I laid out exactly how mutual fund manager Peter Lynch averaged 29% annual returns for more than a decade.

Due to popular demand, today I'm going to lay out exactly how Warren Buffett has destroyed the market for almost half a century. For the uninitiated, he has more than doubled the market's return. Put another way, if you invested $10,000 with him in 1965, you'd be sitting on tens of millions of dollars right now.

I've broken his success down to three basic principles.

Principle No. 1: There will always be opportunities, but those opportunities will change. Be flexible.
Buffett was just a pup investor in the 1950s and 1960s. He didn't have billions to invest, but he created certain advantages for himself.

Back then, information for individual investors was hard to come by. There was no Yahoo! Finance around to get financials in a jiffy, no tweeting CEOs, and no 24-hour news cycle. And that was an opportunity for Buffett. 

He'd literally do the legwork by making trips to Moody's and Standard & Poor's to read old analyst reports, to the Securities and Exchange Commission to read filings, and to company headquarters to talk with management. If you don't think that's incredible, realize that most investors today haven't taken the minute to send in a question to a company's investor relations department ... much less show up on its doorstep.

In those days, he'd invest in opportunities in small-cap companies, exploit some inefficiencies and arbitrages, and do the down-and-dirty, by-the-numbers value investing that his mentor Benjamin Graham preached. And he made excellent returns.

As he went further in his investing career, he diverged from Graham's teachings, partially under the influence of his partner Charlie Munger. He learned the value of buying great companies at good prices, rather than less adept companies at rock-bottom prices. This would serve him well as increased information availability made those early opportunities rarer.

Today, his holding company Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has gotten so large that the small caps he used to enjoy buying are mere drops in the bucket. He has to be more patient as he waits for huge opportunities.

That's why he's known today for his megadeals. For buying multi-billion-dollar stakes in General Electric (NYSE: GE) and Goldman Sachs during their darkest hours. For buying a railroad with a bigger market capitalization than Nike. And for being paid handsome, above-market premiums for insuring against a portfolio of unlikely events.  

Buffett has "skated to where the puck is" his whole investing career.

Principle No. 2: There's no extra credit for activity
Roger Lowenstein, who wrote both a biography on Buffett (Buffett: The Making of an American Capitalist) and a chronicle of disastrous, short-term-thinking hedge fund Long-Term Capital Management (When Genius Failed), has some good perspective on both sides of the trading activity spectrum.

When he was asked in a recent Motley Fool interview to name the most underrated thing about Buffett, he responded: "The most underrated part of his success would be his independence of character, his ability to just not do what everyone else is doing, to stand apart from it ... just not to be affected by it and not swing at pitches he is not sure about."

Now, to be sure, Buffett is far from infallible. He doesn't see everything coming. For example, he didn't foresee the magnitude of the housing crisis. He was adding significantly to his positions in Wells Fargo (NYSE: WFC) and US Bancorp (NYSE: USB) in 2007 -- right before the fall of Bear Stearns and Lehman Brothers and subsequent bank bailouts. Also at the end of 2007, he owned 19% of Moody's -- one of the ratings agencies responsible for terribly overrating the quality of subprime loans and fueling the housing bubble. Heck, he even owned a homebuilder outright – manufactured-homes maker Clayton Homes.  

But here's what makes Buffett great. He avoided using the crazy derivative instruments the Wall Street banks, hedge funds, and insurers gloried in. Remember that Berkshire Hathaway, at its core, is an insurance company. It would have been very easy for Berkshire to get in on all the exotic stuff AIG (NYSE: AIG) got into. It didn't. Buffett also avoided the siren song of excessive leverage.

And then, while the market was in a panic, he didn't massively sell off his bank positions. No, he actually added to his position in Wells Fargo. 

Principle No. 3: You can't be Buffett
Well, for him, it was, "You can't be Ben Graham."

As we talked about in principle No. 1, Buffett had to evolve beyond the teachings of his mentor. Similarly, as tempting as it is, we can't blindly follow everything Buffett does.

One of the famous Buffett stories involves his collegiate days, when he supposedly read all his coursework the first week of the semester, then just breezed through the exams. Believe it or not, I've heard stories of lesser minds who have tried to imitate him. I'll let you guess at the results.  

We must pick and choose which Buffett actions we follow. For example, some of the deals he does aren't available to the public. It would be folly to buy into General Electric and Goldman Sachs just because he did. He got sweetheart deal terms on preferred shares and warrants that we don't get with the common shares.

Don't think this has always been the case, though. Back to Lowenstein for some color:

If you look at the stocks that made him, The Washington Post was selling at four times earnings; anybody could have bought it. Same thing, the ad companies, same thing Coca-Cola (NYSE: KO) back when he bought it in the eighties. Just on and on and on.

Even with the Internet now threatening the Post and all newspapers, Buffett bought into his position at such an opportune time (the 1970s) that it has gone up more than 50-fold. Similarly, Coke is up almost 10-fold. Price matters.

The takeaways
Buffett's an original. No investor will "be the next Buffett." But we can learn from him as we aspire to make our own fortunes.

Buffett learned and adapted throughout his lifetime, mastering the world of small-cap stocks and ratcheting up all the way to making huge acquisitions for one of the largest companies in the world. When he started investing, there were many more opportunities for information arbitrage -- i.e., profiting on information the rest of the market doesn't have access to. Today, it's more about parsing all the information readily available to us, and figuring out which pieces of data matter.

Buffett has been able to thrive throughout because he is, as Munger calls him, "a learning machine." That's something we should mimic.

But don't confuse "learning and adapting" with rapidly buying in and out of stocks, chasing the next new thing. Learning should be constant, but buying and selling should be measured and less frequent.

Fool on!

In this article, I've shown a top-level view of how Buffett has destroyed the market. For specific concepts he has used, check out Buffett's Top 10 Investing Secrets.

Anand Chokkavelu owns shares of Berkshire Hathaway and a poster of Warren Buffett. He may be kidding about the latter. Or not. Berkshire Hathaway, Coca-Cola, and Moody's are Motley Fool Inside Value recommendations. Berkshire Hathaway and Moody's are Motley Fool Stock Advisor picks. Coca-Cola is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a stock repair position on Moody's. The Fool owns shares of Berkshire Hathaway and Coca-Cola. The Fool has a disclosure policy.