5 investing basics from Buffett
The Oracle of Omaha became the world's richest person by adhering to simple but critical tenets. Here are his rules for smart living and savvy investing.
Lesson No. 1: Be frugal
If the economic downturn is forcing you to live simply, look on the bright side: It's making you more like Buffett.
Buffett lives in the same modest house in Omaha, Neb., that he bought more than five decades ago. He drives his own car.
How this does makes him a better investor? First, it gives him more to invest.
Second, a frugal investor will demand this quality from managers. Buffett is leery of corporate waste. Excessive executive pay or silly perks are red flags. Buffett once quipped that companies stack pay committees with "sedated Chihuahuas."
Third, frugal people don't need fast returns to support extravagant lifestyles. This leaves them free to think more clearly about when to buy and sell stocks, making them much better investors.
Lesson No. 2: Wait for the 'fat pitch'
Resist the itch to constantly buy or sell stocks.
Have the patience to wait a long time until some market turbulence brings the "fat pitch," as Buffett calls it, or stocks of great companies trading at really cheap valuations.
Lesson No. 3: Be a contrarian
A great way to make money is to go against the crowd. "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful," Buffett explained in a 1986 letter to shareholders. So be skeptical of the conventional wisdom. Not because the crowd is always wrong but because the crowd's wisdom is probably already reflected in market prices. When the investing public is extremely negative, it's usually a good time to buy stocks. When investors are confident, be careful.
Lesson No. 4: Stick with what you know
One of Buffett's basic rules is: If you don't understand a company's product or how it makes money, avoid it. He calls this "staying within your circle of confidence."
This isn't always easy. During the late 1990s boom, Buffett famously avoided tech companies, confessing that he could not understand what they did. He looked dumb until the bubble burst. "Ultimately, when it came full circle, he was proven right," Lowenstein says.
Lesson No. 5: Don't depend on others to say you're right
If you are in need of constant affirmation about your investment decisions, particularly from the stock market, you won't be able to invest like Buffett.
That's because Buffett makes outsized returns by purchasing disliked value stocks that are so beaten down they're often virtually ignored by the talking heads. They won't be on TV every week telling you that you made the right choice.