Warren Buffett's key lessons for investors include keeping cash on hand, treating shares as pieces of a business, and reining in emotions, according to a recent academic study.
The billionaire investor and Berkshire Hathaway CEO has publicly discussed numerous investing concepts over the years. Dr. Christian Koch identified eight critical ones in “Warren Buffett: A Practical Understanding of Financial Literacy Extended to Managing Investments,” an analysis he conducted for a doctoral dissertation project at University of South Florida, Tampa.
Koch, the CEO of investment-manager KAM South, parsed Buffett's comments during 11 of his shareholder meetings between 1999 and 2019 and identified the key recurring themes.
Here are eight of Buffett's most important tips for investors, based on Koch's findings:
1. Hold cash to capitalize when opportunities arise.
“If there's nothing smart to do, cash is the default option,” Buffett said in 2003.
2. Take advantage of compound interest.
“The nature of compound interest is it behaves like a snowball of sticky snow,” Buffett said in 1999.
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3. Be wary of inflation and hedge against it by owning stocks.
Inflation is “the investors' enemy,” Buffett said in 1999. Rising prices “can swindle the equity investor,” he said in 2003. The best defense against inflation is personal earnings power, but “the second-best hedge is to own a wonderful business,” he said in 2007.
4. Pay attention to the “Buffett indicator.”
Buffett's favorite market gauge is the ratio of stock market capitalization to US gross domestic product, which he once described as “probably the best single measure of where valuations stand at any given moment.” Investors can use it to help them determine whether stocks are overvalued.
5. Holding shares is owning a business.
When Buffett buys shares, he views himself as a minority owner in the company and takes a long-term view of its prospects.
6. Self-discipline is vital.
“You wait for the fat pitch,” Buffett said in 2003. In other words, investors must have the patience to wait for the right opportunity.
7. Controlling emotions is key.
“You do have to have an emotional stability that will take you through almost anything,” Buffett said in 2009.
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8. Watch out for stampedes.
“There is an electronic herd of people around the world managing huge amounts of money who think that a decision on everything in their portfolio should be made, basically, daily or hourly or by the minute,” Buffett said in 2007, flagging the risk of mass panic and everyone rushing for the door.
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