10 Great Pieces of Investment Advice from Warren Buffett

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Warren Buffett is one of the world’s greatest investors. He’s also an all-round good chap who has donated his fortune to the Bill and Melinda Gates foundation to do good things that corporations, charities and governments don’t seem to be able to do (such as finding a cure for Malaria). So what does the one of the world’s richest man have to say about making your money work for you? Here are 10 great pieces of investment advice from Warren Buffet:

Cash is Not an Investment

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We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially.”

It’s common sense really – with inflation the value of cash must always be decreasing; so it’s not an investment.

Get Value for Your Money

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“Price is what you pay; value is what you get.”

This might be rephrased as “buy low” but however you look at it – it’s important to get the most value for your money from an investment. The higher the value and the lower the price; the easier it will be to make money in the long-term.

There’s No Need to Take Big Risks

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“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” and “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”

Investing is about making smart decisions not about taking big risks. Buffett’s approach to risk is simple; don’t do it – make investments based on what you know and how they will pay off for you.

Don’t Let Other People Control Your Actions

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“People will always try to stop you doing the right thing if it is unconventional.”

Just because you’re not going to take risks, it doesn’t mean that you don’t think out of the box when making investments. The idea is to find unique opportunities and then act on them. When you do that – there are going to be plenty of people who try to tell you not to do something. The best thing to do in that situation is to ignore those people.

Do The Opposite of What Other People Are Doing

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“You want to be greedy when others are fearful. You want to be fearful when others are greedy. It’s that simple. … They’re pretty fearful. In fact, in my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now.”

There’s a reason that Buffett famously didn’t lose anything in the dotcom crash; he was doing the opposite of what every other investor was doing. While everyone was betting the farm on companies like Boo.com – Buffett wasn’t.

Don’t Lose Money

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“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Buffett’s point here wasn’t so much as to be facetious but to try and illustrate that investing becomes much harder when you lose money. Then you’re not only trying to turn a profit but also trying to make up your previous losses. That’s the kind of thing that sends gamblers back to the track for “just one more bet”. Safer investments may not be as glamorous as the “next big thing” but they do provide a level of security that the next big thing does not.

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Be Specific, Not General

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“I make no attempt to forecast the general market — my efforts are devoted to finding undervalued securities.”

You can’t evaluate an entire market – not even with the resource Warren Buffett has to hand – so it’s easier and more sensible to devote your time to understanding a single investment vehicle fully than to waste your time trying to make predictions that are beyond anyone’s ability to make accurately.

Don’t Be in a Hurry to Sell

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“when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

If an investment is performing well and appears likely to continue performing well; you are under no pressure whatsoever to divest yourself of the investment. Part of Warren Buffett’s success has been to understand that rule and apply it consistently. When things are going well; there’s no sense in assuming (if nothing fundamental has changed) that they won’t continue to go well. Similarly, if things are going badly – you probably want to get out rather than redouble your bets.

Avoid Optimistic Conditions – Seek Out Pessimistic Ones Instead

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This advice seems almost “Anti-American” given the expectation of “positivity” in much of the corporate landscape today but here’s what Buffett has to say on the subject:

“The most common cause of low prices is pessimism — some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”

Optimistic conditions inflate prices and thus present bad value for the investor; whereas pessimistic conditions which are not justified – depress prices and offer higher value for the investor. Seek out investments where the fundamentals are sound but everyone’s talking them down – that’s where the biggest profits can be found.

Invest in Yourself

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“The best investment you can make is in your own abilities. Anything you can do to develop your own abilities or business is likely to be more productive.”

Perhaps the best bit of advice of them all; if you want to be a successful investor – you’ll need to invest in yourself. If you don’t have the expertise to make investments then the best place to start is by gaining that expertise. People don’t become great investors by accident; it takes planning and careful implementation of that plan to make billions.