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15 Rules Warren Buffett Follows That All Investors Should Know

Author: Selena Maranjian | May 07, 2021

Warren Buffett smiling.

Source: The Motley Fool

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When Warren Buffett speaks…

It would be hard to find a better investing mentor than Warren Buffett, who has invested wisely enough to increase the value of shares of his company, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), by an annual average of 20% over 55 years -- versus just 10.2% for the S&P 500. Better still, Buffett has long been very open about his investing tenets, offering plenty of advice in interviews, annual letters to shareholders, and elsewhere.

Here's a look at 15 Buffett quotes, each of which can help you think better about investing and do better at it, too.

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1. You're smart enough

"Success in investing doesn't correlate with IQ ... what you need is the temperament to control the urges that get other people into trouble in investing."

Many people assume you need to be very smart, with great math skills, to invest effectively. That's not the case. You might simply plow dollars into a low-cost index fund over many years, for example, and that alone can have you amassing significant long-term wealth while outperforming many mutual funds actively managed by financial professionals.

ALSO READ: 3 Warren Buffett Stocks Worth Buying Now

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2. Don't follow the crowd

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

"The best thing that happens to us is when a great company gets into temporary trouble. ... We want to buy them when they're on the operating table."

When the market surges, investors tend to pile in, often buying stocks with little regard to their prices. When the market falls, many bail in a panic, losing money. Don't just do what others are doing. Be prepared to scoop up bargains when there's a market downturn.

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Young man looking sad as money flies out of his wallet.

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3. Fees matter

"If returns are going to be 7% or 8% and you're paying 1% for fees, that makes an enormous difference in how much money you're going to have in retirement."

It sure does. A 1-percentage-point difference in the average annual growth rate for your long-term investments can mean many thousands of dollars left on the table. For example, if you invest $10,000 annually and earn an average of 7% for 25 years, you'll end up with around $676,765. If you earned 8%, though, you'd end up with around $789,544 -- $112,779 more.

Seek and favor low fees in all financial settings -- from your banks, your brokerages, your mutual funds and exchange-traded funds (ETFs), and your 401(k)s, among other things.

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4. Think long term

"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."

Warren Buffett would tell you that no one knows what the market will do tomorrow or next week or month -- or even next year. But over many years, it's very likely to go up. Similarly, a terrific company's stock may languish for a year or two before rising close to its intrinsic value. Once you identify the best investments for yourself, stick with them and be patient. Think twice before cashing out a good gain, because leaving a great company to keep growing can get you a great gain later.

ALSO READ: 3 Warren Buffett Stocks Perfect for Your Retirement Portfolio

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5. Keep up with your holdings

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."

It's not enough to just buy very promising companies and then not thinking about them again for years. Ideally, you should be checking now and then to make sure they're still on course and still promising.

5 Winning Stocks Under $49
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.

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6. Know your limits

"You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."

There are many exciting stocks out there, but they're not equally easy to understand, and it's best if you have a good grasp of the industry a company is in, and having researched them, understand how the companies in it make their money. You should also have a sense of the industry's growth potential and some confidence that it has a promising future. Buffett has famously steered clear of many industries that are outside his "circle of competence," simply declaring them too hard for him to fully understand and to fully have confidence in them for the long term.

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Man in business suit holding sign that says Time to Sell

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7. Leave losers behind

"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be a more productive than energy devoted to patching leaks."

It's a common investing mistake, when you're saddled with a losing stock in which you've lost confidence, to hang on to it anyway, waiting and hoping that it will rise enough for you to make up your losses in it. That's not the smart thing to do, though. Instead, sell and move what's left into a company in which you do have much confidence. You can make up the loss there.

ALSO READ: Warren Buffett Has Gained $158 Billion on These 4 Stocks

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8. Consider index funds

"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."

Investing in individual stocks takes a lot of time, not to mention a rational temperament and some stock analysis skills. If you can't do that, or don't want to, you can always just stick to low-cost index funds, which will give you results roughly matching the stock indexes they track. There's little downside and much upside to index funds.

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9. Expect volatility -- and market crashes

"The years ahead will occasionally deliver major market declines -- even panics -- that will affect virtually all stocks. No one can tell you when these traumas will occur."

For good investing results, you need to have realistic expectations. For example, know that the stock market's long-term average annual gain is close to 10%. Given that, don't be expecting to average 30% or 40%. Also, expect volatility -- and stock market crashes. They will happen every few years. Plan to ride them out and, if possible, to snap up more shares of great stocks when they are on sale.

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10. Know what you're doing

"Risk comes from not knowing what you're doing."

Don't just jump into the stock market or any other investment because someone recommended it -- without learning a lot about it first. It's your hard-earned money at risk, after all. Read up on investing and then keep learning -- throughout your financial life.

5 Winning Stocks Under $49
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.

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11. Favor strong companies

"Buy companies with strong histories of profitability and with a dominant business franchise."

There's little reason to chase risky penny stocks or overvalued high-flying market darlings when there are usually plenty of strong businesses around that are either reasonably valued or undervalued. Companies that are dominant in their industries are worth considering, because they likely have valuable competitive advantages, such as a strong brand or economies of scale.

ALSO READ: Warren Buffett Generates Half of His Dividend Income From These 3 Stocks

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12. Price matters, but so does quality

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

Ideally, you want to invest in high-quality companies that are trading at low prices. If you have to choose between a reasonably priced high-quality company and a mediocre company trading at a terrific price, choose the former. Buffett used to prize value above all, but had his mind changed by his business partner, Charlie Munger.

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13. Swing at the fat pitches

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

Buffett is famous for advising investors to wait for the fat pitches and then to swing hard. There are always gobs of investment opportunities available, but it's only now and then that a really amazing company sees its stock price sink due to some short-term issue. That's the time to pounce.

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14. Assess competitive advantages

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

The best companies in which to invest tend to have sustainable competitive advantages -- such as strong brands, proprietary technology, economies of scale, superior designs, superior quality products, a network that's hard for others to duplicate, and/or switching costs that make it seem too much of a hassle for customers to switch to another company.

ALSO READ: 3 Popular Robinhood Stocks That Warren Buffett Owns -- and You Should Too

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15. Be able to sleep at night

"We never want to count on the kindness of strangers in order to meet tomorrow's obligations. When forced to choose, I will not trade even a night's sleep for the chance of extra profits."

Never base your investing on wishes and hopes. Instead, base it on educated projections of companies' future values and on rational conclusions drawn from research, with a margin of safety built in. Don't take unnecessary risks. You can do quite well without taking chances on penny stocks, unfamiliar high-flying stocks, market timing, margin loans, and so on. Buy into great companies and aim to hang on for years, if not decades.

5 Winning Stocks Under $49
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.

Previous

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Invest in yourself

"The most important investment you can make is in yourself."

Finally, invest in yourself. There are many ways to do so, all of which are worthwhile. For starters, if you want to be a successful investor, read a lot about investing, business, and money management -- and keep doing so. If you want to advance in your career, keep learning more about your field and pursue additional degrees or professional certifications. (Ask for a raise now and then, too -- you'd be surprised how many people get one when they ask.)

As you read and learn, aim to learn more about Warren Buffett, as there's plenty more to learn from him.

Selena Maranjian owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200.0 calls on Berkshire Hathaway (B shares), short January 2023 $200.0 puts on Berkshire Hathaway (B shares), and short June 2021 $240.0 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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