Warren Buffett is one of the best investors in history, and is widely regarded as the “Oracle of Omaha.”
Buffett is a value investor at heart, but he also shares a lot of other insights during shareholder meetings and in his annual letter to shareholders. As such, it is pretty easy to understand Warren Buffett’s investing philosophy.
Plus, since his holdings are so widely followed, you can check his portfolio anytime at the CNBC Berkshire Hathaway Portfolio Tracker.
While over time he has thrown out a ton of different tidbits on investing, here are the top five investing tips Warren Buffett has given:
1. Cash Is King
Cash is a big deal to Warren Buffett, and he keeps a lot of it on hand at any given time. The reason? In Warren Buffett’s words, he keeps a lot of cash on hand “so that we can both withstand unprecedented losses and . . . quickly seize acquisition or investment opportunities.”
Also, in his 2011 letter to shareholders, Buffett reprinted a note from his grandfather from 1939: “I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash . . . I hope it never happens to you.”
That is solid advice for personal finance. You always want to maintain an emergency fund for the unexpected, but you should also keep cash in your brokerage account ready to go so that you can buy things on the dip.
For example, if you had piles of cash waiting to invest when the financial crisis hit, you could have bought low and sold high, reaping huge 50% to 100% profits on your investment. However, if you had everything tied up in investments, you would have just suffered large losses.
2. Be Fearful When Others Are Greedy
One of Buffett’s most famous phrases is, “Be fearful when others are greedy, and greedy when others are fearful.” This great sentiment is very true of our stock market and investing system.
The bottom line is that you should avoid the stocks that everyone else is buying, as they probably are overvalued. Instead, look for the stocks that few people are paying attention to, check their fundamentals, and invest if it makes sense.
3. Dividends Are Your Friend
Buffett loves dividends, as do most value investors.
Dividends are a great perk to buying a company, as it usually shows that the company’s finances are in good enough shape to support paying out its hard-earned money.
Buffett likes companies that have a long history of paying dividends, and even increasing them over time. A popular tracker of these type of stocks is the Dividend Aristocrats, which are companies that have increased their dividends over the last 25 years.
Plus, Buffett recently announced that there is a good chance that the total amount of dividends paid by his position in Coca-Cola will soon surpass what he paid for the stock. That is a great return on investment!
4. Always Buy Undervalued Stocks
Buffett is a big-time value investor, and always looks to buy undervalued stocks based on their intrinsic value.
He calculates the intrinsic value by looking at the company’s fundamentals — at a minimum of over the last five years, sometimes longer. He looks a lot at return on equity, operating margins, and having little or no debt. He compares the company to its peer group, and likes to see if it is undervalued.
A key part of this is also looking for companies that have some type of monopoly or special trait that will enable it to be successful in the future. This could be technology (even though Buffett avoids tech stocks that he doesn’t understand), or even management. All of these factors can contribute to intrinsic value.
5. Buy and Hold
Finally, Buffett is a true buy-and-hold investor. He holds his positions for a long period of time, and constantly reiterates this to his followers.
In fact, he has said that he likes to “buy and hold forever.” And it is true, since he has owned many of his positions for over 20 years, which is eons in the investing world.
However, he has also said that this doesn’t mean hold a company if the fundamentals have changed. Buffett constantly looks at his portfolio and if a company loses its edge or superiority, then he does sell or trim back his position.
He also is a huge believer in patience. Basically, don’t trade, invest. Find companies you like, and wait for the right price. It has been said that Buffett has a list of hundreds of companies that he wants to invest in, but that he is waiting for the right price and opportunity.
The last time he went on a buying spree was the Great Recession, when stock prices tanked. He was able to scoop up deals and get in on prices that made him get great returns in the following years.
Kurt @ Money Counselor says
July 12, 2012 at 6:53 amThe investing rules that Buffett has always lived by seem so simple and common sense that one wonders why he’s been so much more successful than the average money manager. Why doesn’t everyone else catch on to the Buffett method? I don’t know the answer, but would be interested in others’ opinions. Warren is truly one of a kind, and that’s the mystery to me.
Robert says
July 12, 2012 at 6:55 pmHe’s not one of a kind, but definitely one of the more well known value investors. In fact, many of his best friends were all part of the School of Graham and learned value investing first hand.
I think the hardest part for most people is doing the research. Buffett spends a lot of time reading reports and doing research, which isn’t feasible for investors that don’t do it full time.
WorkSaveLive says
July 12, 2012 at 9:47 amI love the concept of “being greedy when others are fearful.” So many people can’t buy and hold their positions because they let emotions take control of their decisions.
I think that may be part of the answer to Kurt’s question as well. I see a lot of advisors that play off of the fear/greed that their clients have. Many times, advisors get more commissions the more they trade their clients’ assets. So, when the market tanked in 2008, I knew of advisors that called their clients, playedd off of the fear, and suggested that they buy something different.
Maybe it’s just ignorance on the part of the advisor, or maybe they suggest it because they know that’s what the client wants to hear. Or…maybe they want to make some extra money and use the last part to their advantage.
Robert says
July 12, 2012 at 6:56 pmI think some brokers do use that to their advantage, but most brokers have to basically sell you a product from a list pre-selected by the company they work for. There is no independent thinking at all.
krantcents says
July 12, 2012 at 10:47 amMy impression of Warren Buffett is he thinks of investing as long term. I think too many people tend to look for short term profits.
Marissa @ Thirty Six Months says
July 12, 2012 at 12:15 pmI completely agree. “Buy and hold” is such an issue for so many people. The get rick quick schemes get ppl in trouble.
Robert says
July 12, 2012 at 6:57 pmYes, Buffett is very very long term, where I think that long term for most people is 1-3 years. For Buffett, it could be 30 years.
Ben @YoungMoneyFinance says
August 9, 2014 at 6:24 pmBig fan of Buffett. Think my favorite is #4. He has another quote, “Be greedy when others are fearful and fearful when others are greedy.” Learn to see value where others don’t!
Thias @Wealth Hike says
August 9, 2014 at 7:27 pmThe idea of keeping some cash on the sidelines is a great advice. Everyone always wants to take advantage of market dips to get discounted positions, but if you don’t have extra cash on the sidelines for those opportunities, you are going to miss them.