It’s very rare to find advice about investing specifically geared toward young adults and teen investors. And more importantly, financial literacy does not typically find its way into the high school and college curriculum. It’s not surprising that the average college graduate in 2014 has more than $33,000 worth of debt in student loans.
More importantly, the young teenage investors have the largest advantage over anyone else in the market… They have the advantage of time. They have more time to learn. They have more time to get comfortable with the stock market. And most of all, they have more time to reap the ultimate rewards of long-term investments.
In the same spirit, we’ve chosen four quotes from the chairman and CEO of Berkshire Hathaway, Warren Buffett, which share some very important lessons for investors that are just starting out. Beginning his investing career at the age of 11, Warren Buffett has been looked upon as a sage of the stock market, and he’s considered one of the greatest investors around the world. His overall philosophy is to buy excellent businesses and hold them for the long-term and his disciplined strategy and investment acumen has allowed him the opportunity to grow Berkshire Hathaway’s share price from $11 in 1962 to over $192,000 per share today.
These overall quotes offer a basic framework for investing that comes directly from the Oracle of Omaha, and is perfect for young investors looking to solidify their financial future from an early age
These quotes provide a basic investing framework — straight from the Oracle of Omaha himself — for young investors looking to get a head start on their financial future.
1. The Power of Time
“Time is the friend of the wonderful business, the enemy of the mediocre.”
Excellent businesses thrive as time passes. But mediocre businesses, on the other hand, will likely fall apart given enough time.
In Buffett’s 2001 letter to shareholders, he wrote, “You only find out who is swimming naked when the tide goes out.” Just as similarly, as times get hard, we often find the businesses that are truly great. The main challenge is to build up a portfolio of all of the best companies. Over many years, great businesses have the opportunity to grow and expand, and this will reward the patient investor throughout the process.
For excellent businesses, time is a friend. Time is also one of the biggest advantages that investors have. This especially holds true for investors that are young and have plenty of years ahead of them in order to reap the great rewards that compounded returns have to offer.
Here is an example to better understand compounded returns…
Let’s say that you have $100 sitting under your mattress, and over the next five years you add $50 more each year. After the five years are up, you’ll have a total of $350 and a bed filled with lumps. Now, if you chose to invest this money in the stock market and received a 5% return each year instead of stuffing the money under your mattress, over the five-year period you would have made $417.72. If you followed the same process for 10 years, you would have over $800. Compounding investments are amazing, but time is the main requirement to experience maximum benefits.
2. Buying and Holding
“In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.”
Look closely for businesses that appear they will compete and continue to grow over the course of many years. And more importantly than that, if those businesses do become excellent investments, do not rush to cut short your gains. The best investors like Lynch and Buffett measure gains in years and even decades, not for the short-term, like days and months.
3. Looking to the Future
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
The goal is to find incredible businesses that you would feel comfortable owning even if the stock market shut down for five or even 10 years. It’s impossible to project short-term market movements. You need to focus your investing energies on finding quality businesses that you’d have no problem owning for decades.
As an example using Warren Buffett, during 1988 and 1989 Mr. Buffett invested more than $1 billion into Coca-Cola. The Berkshire Hathaway CEO was very impressed with Roberto Goizueta, Coca-Cola chief executive officer, and the glowing presence of the Coke brand and its global reach. 35 years later, Berkshire Hathaway and Warren Buffett still own these original shares of Coca-Cola, and they have risen more than 1200% in value throughout that time.
The moral of the story is to focus on investing in companies that you would feel good holding for many years, no matter what short-term patterns the market might be showing you.
4. Keeping Your Cool and Avoiding the Herd
After a 25% drop in the S&P 500 in October 2008, during a one-month period in the opening stages of the Great Recession, Warren Buffett penned the following:
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”
Even businesses that have seen the most success will stumble every once in a while. As an investor, the key is to forget about the daily headlines. You need to focus on the business and their long-term strengths. This is much easier said than done, and this was especially true in 2008 when things looked grim. But the effort is well worth it to develop the discipline of finding and focusing on purchasing companies that deliver strong long-term results.
The Bottom Line
Young people should not be intimidated by investing, and neither should anyone no matter what their age. If you study and listen to the wise words of the best investors like Warren Buffett, you have the opportunity to put yourself in a position of years of investing success. Start your journey into investing today and you’ll be very glad that you did.
Investing need not be intimidating for young investors (or investors of any age, for that matter). By studying and following the wise words of great investors like Warren Buffett, we can position ourselves for investing success in the years ahead. Start your investing journey today and you will be happy that you did.