9 important investment lessons from Buffett

Source: KTVZ21; Compiled by: Tao Zhu, Golden Finance

From selling chewing gum for profit as a child to building textile manufacturing company Berkshire Hathaway into a giant conglomerate and becoming one of the components of the S&P 500 index, Warren Buffett has shared countless investment advice over the years.

Buffett is widely regarded as the greatest investor of all time, so when he speaks, we investors should generally listen carefully. He is not called the "Oracle of Omaha" for nothing.

Buffett announced that he will step down as CEO at the end of the year at Berkshire Hathaway's 2025 shareholders' meeting. So in honor of his seemingly endless flow of investment wisdom - Buffett is still chairman, so he has not fully retired yet - this article summarizes nine important investment lessons from Berkshire Hathaway's annual shareholder letters over the past 60 years.

1. Invest in businesses you understand

Only invest in companies you can thoroughly evaluate. Stay humble - admit what you don't know and don't invest in a business you don't understand. Buffett sold Coca-Cola door-to-door as a kid, invested in Coca-Cola stock in 1988, and received $776 million in dividends in 2024.

You don't need to be an expert on every company, or even many companies. You just need to be able to evaluate the companies within your circle of competence. The size of this circle of competence is not important, but it is crucial to know its boundaries.

2. Buy excellent companies at reasonable prices

Buy excellent companies at reasonable valuations. Don't buy mediocre companies just because they are cheap. Berkshire Hathaway bought See's Candies in 1972 for $25 million, and as of 2011, the company had pre-tax profits of $1.65 billion. He called See's "the epitome of a dream business."

It is much better to buy a great company at a reasonable price than to buy a mediocre company at a good price.

3. Think long term

Avoid frequent trading and hold for the long term to benefit from business growth. Over time, solid companies will increase earnings, expansion and innovation.

In fact, when we hold shares of good businesses and good management, our ideal holding period is forever.

4. Focus on intrinsic value

Investing should be based on the intrinsic value of a company, not its market price. Markets are not always rational.

We define intrinsic value as the discounted value of the cash that can be extracted over the remaining life of the business. Anyone who calculates intrinsic value is bound to arrive at a highly subjective number that changes as estimates of future cash flows are adjusted and interest rates change. However, despite the fuzziness of intrinsic value itself, it is critical and the only reasonable way to evaluate the relative attractiveness of investments and businesses.

5. Be greedy when others are fearful

Buy when the market is pessimistic to acquire undervalued assets. Be rational when others are struggling. During the 2008 global financial crisis, Buffett invested $5 billion in Goldman Sachs preferred stock. Goldman redeemed those shares in 2011, generating a $3.7 billion profit for Berkshire Hathaway.

However, we do know that the two super-contagious diseases of fear and greed will always occasionally break out in the investment community. The timing of these epidemics is difficult to predict. The market anomalies they cause are equally difficult to predict, both in duration and magnitude. Therefore, we never try to predict the arrival or retreat of either disease. Our goal is more modest: we simply try to be fearful when others are greedy, and only greedy when others are fearful.

6. Avoid Emotional Investing

Investment decisions should be based on analysis, common sense, and sound judgment, not emotional reactions. Avoid being swayed by fear and greed.

In my view, investment success does not come from arcane formulas, computer programs, or signals sent by stock and market price behavior. Instead, investor success lies in combining good business judgment with the ability to insulate one's own thoughts and actions from the highly contagious emotions in the market.

7. Ignore Market Noise

Focus on company fundamentals and the long-term prospects of the business you are investing in, not on short-term market forecasts or media hype.

Forming macro views or listening to other people’s macro or market forecasts is a waste of time. In fact, it’s dangerous because it can obscure your perception of the truly important facts. (When I hear TV commentators spout off on where the market is going next, I think of Mickey Mantle’s acerbic comment: “You don’t know how easy the game is until you get in that studio.”)

8. Value Competent Management

Think of stock investing as becoming a part owner of a company. Who do you want on your side? Invest in businesses run by honest and competent managers.

We select marketable equity securities in much the same way that we evaluate a business for acquisition as a whole. We want a business that (1) we understand; (2) has good long-term prospects; (3) is run by honest and competent people; and (4) is attractively priced.

9. Patience is a virtue

Be patient and wait for investment opportunities that meet your standards and avoid unnecessary actions. Similarly, give your investments time to grow and believe in the long-term potential of excellent companies.

Patience can be learned. "Having a long attention span and the ability to focus on one thing for a long time is a huge advantage." - Charlie Munger said.

Summary

Warren Buffett's letters to shareholders over the decades are summarized as follows: Invest in areas you understand, maintain discipline, and patiently play the long game. From choosing companies with strong fundamentals to patiently waiting for the right opportunity, Buffett's teachings are timeless and a reliable roadmap to smarter investing.