Buffett’s 5 Rules of Investing

Billionaire CEO and chairman of Berkshire Hathaway, Warren Buffett, uses an example of a farm that he bought in 1986 as a way to caution investors about frequently buying and selling stocks.

He says that investors should treat all of their equity holdings like they would treat real estate purchases, focusing strictly on potential profits over a long period of time, and not the short-term price fluctuations. The 83-year-old Buffett’s annual letter will be published on March 1, but an excerpt was published on Fortune magazine’s website Monday.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations,” said Buffett. “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

While building Omaha, Nebraska-based Berkshire Hathaway, Buffett has followed a buy-and-hold investing strategy and turned the company into a $280 billion conglomerate. They currently own shares of American Express, Wells Fargo and Coca-Cola. He also mentioned that individual investors might not want to use his approach to picking stocks. He said they should purchase a fund that holds all of the stocks in the S&P 500 index.

“The goal of the nonprofessional should not be to pick winners,” wrote Buffett. “The ‘know nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

Buffett shared five bullet points about investing, which are paraphrased here:

  • “You don’t need to be an expert in order to achieve satisfactory investment returns.” Buffett also warns us that investors need to recognize their limitations and “keep things simple.”
  • “Focus on the future productivity of the asset you are considering,” notes Buffett that people cannot perfectly predict the future profitability of any investment. “[O]mniscience isn’t necessary; you only need to understand the actions you undertake.”
  • “If you instead focus on the prospective price change of a contemplated purchase, you are speculating.” Buffett does not have anything against price speculation. He does emphasize the importance of knowing the differences between investing with the hopes that the price of the asset changes as opposed to investing for the asset’s productivity.
  • “With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.” To put it simply, keep your focus on the long-term.
  • “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed it is dangerous because it may blur your vision of the facts that are truly important.” So take Fox Business, Bloomberg TV and CNBC with a grain of salt.