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Warren Buffett is the most successful investor of our time and the third richest man in the world because of it.
He is famous for his pithy quotes, which often appear in his annual letter to shareholders.
1. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
2. Investing is laying out money now to get more money back in the future.
3. Never invest in a business you cannot understand.
4. I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
5. I put heavy weight on certainty. It’s not risky to buy securities at a fraction of what they’re worth.
6. If a business does well, the stock eventually follows.
7. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
8. Time is the friend of the wonderful company, the enemy of the mediocre.
9. For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
10. In the short run, the market is a voting machine. In the long run, it’s a weighing machine.
11. The most common cause of low prices is pessimism. 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. None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling.
12. Risk comes from not knowing what you’re doing.
13. It is better to be approximately right than precisely wrong.
14. All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.
15. Wide diversification is only required when investors do not understand what they are doing.
16. You do things when the opportunities come along. I have had periods in my life when I have had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.
17. [On the dot-com bubble:] What we learn from history is that people don’t learn from history.
18. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.>
19. You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.
20. You should invest in a business that even a fool can run, because someday a fool will.
21. When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
22. The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.
23. Diversification may preserve wealth, but concentration builds wealth.
In a similar vein Peter Lynch from Fidelity signed off his last book, Beating The Street, with 25 Golden Rules for Investment.
If you’d invested £10,000 in Peter Lynch’s Fidelity Magellan fund when he took over its control in 1977 it would have grown to £280,000 in just thirteen years.
That’s a whopping overall return of 2,700% or, to put it another way, a compounded annual return in excess of 29% per year!
Lynch’s 25 rules to successful investment (not a lot different to Warren Buffett)
1. Investing is fun, exciting and, if you don’t do any work, dangerous.
The Fool is well known for its ‘do your own research’ mantra. As well as researching potential new investments, it’s important to keep abreast of events within those companies whose shares you already own.
2. You can outperform the experts if you invest in companies you understand.
This parallels Warren Buffett’s advice to invest within a ‘circle of competence.’ If you stick to industries and companies you understand, you potentially reduce the risk of making big mistakes. However, it’s possible to expand the circle, as many Fools have proved by successfully investing in oil company shares, for example.
3. You can beat the market by ignoring the herd.
Popularity often leads to overpricing. Sometimes the road less travelled leads to the best opportunities.
4. Find out what the company behind a share is doing.
5. Often, and for long periods, company performance can remain disconnected from its share price performance. Long term, there is correlation and the temporary disparity is the key to investment success. It pays to own successful companies, with patience.
6. You have to know what you own, and why you own it.
Peter Lynch famously asserted that you should be able to describe the investment ‘story’ in one, or two, short sentences. If you are unable to, perhaps you shouldn’t be holding the shares.
7. Long shots mostly miss the mark.
8. There needn’t be more than five companies in a portfolio. A part-time share picker has time to follow roughly eight to twelve companies.
Both Peter Lynch and Warren Buffett recommend a carefully chosen, concentrated portfolio for building wealth.
9. If there are no attractive companies, put your money in the bank until you find some.
10. Never invest in a company without understanding its finances, particularly the balance sheet.
A company’s balance sheet will tell you whether it is solvent. Weak balance sheets are a notorious source of investor losses.
11. Avoid hot shares in hot industries. Great companies in cold industries are consistent winners.
The latest share craze, like tech companies at the turn of the century, often leads to overpriced shares, which can disappoint investors in the longer term. A good company operating in a stable, if unexciting industry can serve you better.
12. Wait until a company turns a profit before you invest.
Tomorrow’s jam may never come; go for jam today.
13. Wait for troubled industries to show signs of recovery before investing in them. Even then, pick resilient companies and be aware that some industries never do recover.
14. It only takes a few big winners to make a lifetime of investing worthwhile. If you invest £1,000 in a share, that’s all you can lose, but you stand to gain multiples of that amount. Don’t diversify that advantage away with too many shares.
A few big winners are all you need. If you spread your money between too many shares, the big wins become little wins, after all.
15. The observant amateur may discover great growth companies long before the professionals.
16. Stock market declines are common: they are great opportunities to buy bargain shares.
17. Successful investing requires modest brainpower and a strong stomach.
Stock markets are volatile but, if you hold your nerve, volatility can present great buying and selling opportunities as companies become alternatively under or over valued.
18. Trade shares according to the companies’ fundamentals and not according to wider concerns, as there’s always a source of external worry.
19. Ignore economic predictions and follow what’s happening in the companies you own.
There is a lot to worry about in the world right now. However, good companies keep reporting steady financial, operational and strategic progress, whilst wider concerns keep their share prices held down. That’s potentially a good time to be buying undervalued companies.
20. There’s always an over-looked company on the stock market, where share prices are undervaluing its prospects. All you have to do
is discover it.
21. If you don’t study the companies behind your investments, it’s gambling.
22. Time is on your side when you own shares in great businesses.
23. If you do not have time to invest actively, buy a few share funds with differing strategies.
24. Overseas focused funds can provide access to faster-growing economies.
25. In the long run, a portfolio of well-chosen shares and/or funds will out perform most assets classes. However, a portfolio of badly chosen share investments underperforms cash under the mattress.