Investment wisdom from the world’s 3rd richest man

Warren Edward Buffet. CEO of Berkshire Hathaway and ranked as one the world’s richest men, is also noted for his essays and pronouncements about business and investing as well as about life itself.

Here are some nuggets of wisdom from this acclaimed  business magnate, investor and philanthropist:

Never invest in a business you cannot understand

This doesn’t mean we cannot invest capital in these areas of the market, but we should approach with caution.

I will be the first to tell you that I cannot forecast the success of a biotechnology company’s drug pipeline. Nor predict the next fashion trend in teen apparel.  Nor identify the next technological breakthrough that will drive growth in semiconductor chips.

These types of complex issues materially affect the earnings generated by many companies in the market but are arguably unforecastable.

When I come across such a business, my response is simple:  “Pass.”

Never compromise on business quality.

Buffet’s investment philosophy has evolved over many years  to finally focus on buying high quality companies with promising long-term opportunities for continued growth. 

“It is far better to buy a wonderful company at a fair price than  a fair company at a wonderful price.”

Companies that earn high returns on the capital tied up in their business have the potential to compound their earnings faster than lower-returning businesses.  As a result, the intrinsic value of these enterprises rises over time.

When you buy stock, plan to hold it forever.  If you aren’t thinking of owning a stock for ten years, don’t even think of owning it for ten minutes.   Quality businesses earn high returns and increase in value over time.  Fundamentals can take years to impact a stock price and only patient investors are rewarded.

The stock market is designed to transfer money from the active to the patient.

Diversification can be dangerous

Diversification is a protection against ignorance.  It makes very little sense for those who know what they are doing. 

Owning 100 stocks makes it virtually imposible for an investor to keep tab on current events affecting his holdings. 

Most news is noise, not news

Most of the news headlines  and TV conversations are there to generate buzz and trigger our emotions to cause them do something – anything!

Owners of stock, however, too often let the capricious and often irrational behavior of their fellow owners to cause them  to behave irrationally as well.  Because there is so much chatter about markets, the economy,interest rates, etc., some investors believe it is important to listen to pundits and worse yet consider acting upon their comments.

The companies I focus on investing have thus far withstood the test of time.  Many have been in business for more t than a hundred years and faced virtually every  unexpected challenge imaginable.

Imagine how many pieces of gloom-and- doom news originated over their corporate lives.  However, they are still standing.