3 Things to Learn From Warren Buffett

Berkshire Hathaway will be holding its annual meeting on the May 3, 2014 this year. This is an eagerly awaited event by all investors. It’s even been called the “Woodstock for capitalists.”

With that said, let’s take a look at three important things that you can learn from Warren Buffett. He’s one of the best investors, so it makes sense to pay attention to the things he says and does.

Buffett Knows How to Hold on to Stocks for the Long Term

Buffett understands that the best way to win on investments is to buy great companies and hold them for long periods of time.

As an example, let’s look at Wells Fargo. This bank is practically synonymous with Berkshire Hathaway and Warren Buffett. It’s the company’s largest stock position at the moment. Buffett began buying shares of Wells Fargo back in 1989, and has owned the stock ever since. As of the end of last year, Wells Fargo gains have created over $10 billion worth of value for the shareholders of Berkshire Hathaway.

How to take advantage of Buffett’s long-term strategy:

Do your research. Find great companies to buy. When you purchase shares, stay as patient as possible. The company will compound your investment over time when given the chance. Wall Street spends its focus on short-term investments. This provides ample opportunities to benefit from time arbitrage.

Buffett Admits When He Makes a Mistake

Forget about ego. Buffett has no fear or worries about owning up to his mistakes.

Here’s an example of Buffett calling himself out in the most recent Berkshire Hathaway letter to shareholders:

“Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn’t… About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie. That was a big mistake. Unless natural gas prices soar, EFH will almost certainly file for bankruptcy in 2014. Last year, we sold our holdings for $259 million. While owning the bonds, we received $837 million in cash interest. Overall, therefore, we suffered a pre-tax loss of $873 million. Next time I’ll call Charlie.”

How to use this to your advantage:

Nobody likes to make a mistake. This is especially true when it’s going to cost you money. But some of the best opportunities to learn about investing come from making mistakes. So resist the urge to forget about the mistakes and sweep them under the rug. Instead, you should look at them closely to figure out how they can help you make better decisions the next time you invest.

Buffett Understands What He’s Good at and Doesn’t Pay Attention to the Rest 

Buffett is a savvy investor and smart with capital allocation. He definitely knows the best place to invest the Berkshire Hathaway cash. But he doesn’t have any particular special knack or knowledge for managing an operating business.

Buffett delegates the day-to-day operations to Berkshire Hathaway managers at the company subsidiaries. His main focus is capital allocation, which is what he is best at.

How you can follow in Buffett’s footsteps:

Use your time wisely. Put your best effort forward in the areas that you excel in. As an individual investor, if you have the time and talent, plus the interest, you can earn substantial returns on your investment and beat the market.

But if you’re better at something else that has nothing to do with the stock market, then you should focus on that endeavor. Instead of investing in stocks, put your money into low-cost index funds.

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