12 Investing Lessons From Warren Buffett

In his investing career -- and especially during his 56-year tenure as CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) -- Warren Buffett has been notoriously quiet when it comes to his reasoning for buying specific investments or his exact analytical processes.

However, Buffett has not been so quiet when it comes to sharing valuable investing wisdom with Berkshire Hathaway's shareholders and everyday investors. Here are a dozen of the most important lessons investors of all experience levels can learn from the Oracle of Omaha.

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Some of Buffett's best investments have come during market crashes and turbulent economies. As one example, Buffett's Bank of America investment, which originated in the wake of the financial crisis, more than quadrupled in value by the beginning of 2020. In other words, a plunge in the stock market is much more of a reason to buy than a reason to sell.

As Buffett says, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."

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Although Buffett is definitely a fan of investing when everyone else is panicking, it's important to learn that Buffett focuses on companies with underlying businesses that will do fine, even if the economy isn't healthy. Consider some of Berkshire Hathaway's subsidiaries -- insurance companies, utilities, and railroad transportation businesses are among the largest, and all are about as recession-resistant as you can get. In Buffett's words, "Predicting rain doesn't count, building the ark does."

One of Buffett's favorite investing concepts is the "margin of safety," which can help you choose stocks that won't get wiped out if the economy were to turn sour. Buffett explains it this way: "Don't try and drive a 9,800-pound truck over a bridge that says it's, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds."

As a real-world example, if a company depends on discretionary spending for revenue, but also has billions of dollars in cash and no net debt like top Buffett stock holding Apple, it is a big margin of safety during tough times.

When investing, focus on quality. Don't buy a stock just because it's cheap. Worry about buying a great business first, and then look at valuation. This is why Buffett has been loading up on Bank of America stock in 2020 while simultaneously trimming the Wells Fargo stake. The latter is certainly the cheaper bank but has been plagued by scandals and isn't as well positioned to stay profitable in a prolonged recession.

In Buffett's words, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

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Many new investors jump into the market with a short-term mentality. They'll say things like "I'm buying XYZ Company at $10 because I think it'll be worth $15 by the end of the month." If you think that way, you aren't investing -- you're gambling. The most surefire path to wealth in the stock market is to buy top-quality companies and hold onto them for as long as they remain that way. "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes," Buffett said.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Every investor is wrong about a stock from time to time, and Buffett is certainly no exception. But you have to be ready to admit you were wrong and move on, even if it means selling at a loss. Buffett has said, "The most important thing to do if you find yourself in a hole is to stop digging." And it was this mentality that prompted Buffett to unload all of Berkshire's airline stock positions shortly after the COVID-19 pandemic started.

Buffett is obviously a fan of investing in individual stocks. But he also has the time, knowledge, and desire required to do it right. "If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds," Buffett advises.

And if you're better suited for index fund investing, don't think for a second that you can't get strong investment returns. A $10,000 investment in a low-cost S&P 500 index fund in 1990 would have compounded to more than $185,000 today, assuming the reinvestment of your dividends. As Buffett said, "It is not necessary to do extraordinary things to get extraordinary results."

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As knowledgeable and successful as Buffett is, you might think he knows all there is to know about investing. But that's not the case. In fact, he spends nearly all of his workdays sitting in his office and reading, absorbing as much knowledge as he possibly can.

"Read 500 pages like this every day," Buffett advises. "That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it."

If you bought Tesla stock recently, did you do so because you evaluated the company and liked what you saw? Or did you buy it because it's a popular stock that seems to go up and up? One of these is sound investment reasoning that can serve you well. The other may work out in the short term but often gets investors into costly trouble.

As Buffett says, "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

When asked about negative news headlines, Buffett is quick to point out that in the 1900s alone, the U.S. experienced about a dozen recessions, a terrible pandemic, two world wars and several other military conflicts, an oil crisis, and a ton of political drama. And the Dow Jones Industrial Average still managed to rise by more than 17,000% for the century.

In a nutshell, short-term noise doesn't change the fact that American innovation is a powerful force that should do very well over the long run. "For 240 years it's been a terrible mistake to bet against America, and now is no time to start," Buffett wrote in his 2015 letter to shareholders.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Many investors are surprised to find out that Berkshire will generally acquire a business only if it already has a management team in place, which will remain with the business after the acquisition is finalized. The reason? Buffett likes to invest in great managers, considering them to be one of the best competitive advantages a business can have.

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Berkshire Hathaway may have invested in a gold mining business recently, but don't expect any of the precious metal itself to end up in Berkshire's investment portfolio. Simply put, Buffett views gold, other precious metals, cryptocurrencies, collectibles, artwork, and other similar items as "unproductive assets." In other words, these things don't generate income, pay dividends, make a product, or do much of anything. Their value is simply based on the premise that someone else will pay more for it than you did at some point.

"I have no views as to where it (gold) will be, but the one thing I can tell you is it won't do anything between now and then except look at you," Buffett says. Instead, he's happy to stick with businesses, stocks, and even bonds, whose productivity gives them intrinsic value.

This is just a sampling of the valuable lessons Warren Buffett has shared in his first 90 years, and while it's not a smart idea to invest in a particular stock just because he has, it can be a brilliant idea to learn as much from Buffett's wisdom as possible.

Matthew Frankel, CFP owns shares of Apple, Bank of America, and Berkshire Hathaway (B shares) and has the following options: short November 2020 $20 puts on Wells Fargo, short January 2021 $23 puts on Bank of America, and short October 2020 $140 calls on Apple. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Tesla and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.