As the most successful investor of all time and one of the richest men on Earth, Warren Buffett has held to a few timeless principles over the years that have made his reputation in the investing community as good as gold.
And rightfully so. Buffett's Berkshire Hathaway investment portfolio has averaged staggering annual returns of 20% per year since 1965 -- doubling the average annual return of the S&P 500 over the same period. In other words, every $100 invested with Buffett then would be worth $910,000 today.
With a track record like that, it may be worth looking at some of Buffett's sage investing advice to see how we might improve our own portfolio performance. After polling some of our StreetAuthority experts, I came up with a few of our favorite lines from Buffett over the years:
1. "Our favorite holding period is forever."
It may not be trendy or sophisticated, but buy-and-hold investing -- Buffett's favorite strategy according to Berkshire Hathaway's 1988 letter -- may be one of the few strategies actually proven to consistently make money over the long term. The proof comes from an Oppenheimer study, which found that the S&P 500 (commonly used as a benchmark for the stock market) never suffered a loss over any 20-year period going all the way back to 1950. The extensive study also showed short-term investing can be a bad idea, as the S&P 500 lost money 16 times in a one-year-period since 1950.
2. "If a business does well, the stock eventually follows."
Don't just buy stock if you want strong returns. Buy shares in a business you'd be proud to own, and be prepared to reap the rewards. Much of Buffett's investing success has come from buying well-managed companies with solid economic moats (i.e. lasting competitive advantages), consistently high return on equity (ROE), and low debt. He also admires companies with leaders that readily admit mistakes, have the interests of shareholders at heart, and own a large portion of the company shares themselves. (You can see Buffett's full criteria on page 23 of his 2014 shareholder letter.)
3. "Investment must be rational; if you don't understand it, don't do it."
Buffett advocates owning established companies with household name brands and understandable business models. One look at Berkshire Hathaway's portfolio should illustrate this point, as well-known and simple companies like Coca-Cola (NYSE: KO) and American Express (NYSE: AXP) continue to be some of its largest holdings, making the firm more than ten times its original investment. It doesn't always work out, though... Buffett famously missed out on tech stocks like Apple and Amazon (Berkshire only recently bought Apple after one of the most impressive runs in history) -- but that's because he always admitted he didn't quite understand tech. Most investors would be better off knowing when to "stay in their lane" and avoid what they don't know, too.
4. "Diversification is protection against ignorance. It makes little sense for those who know what they're doing."
Yes, it's true that Buffett recommends that non-professional investors buy shares in diversified, low-cost S&P 500 index funds to avoid risk. But how can you beat the broader market when your portfolio is the market?
In other words, if you know an industry well (or work in it), you may have a better-than-average chance of spotting a good company and thus a potentially market-beating stock. And if you're picking your own stocks, then it's far more likely you've come up with only one or two really good ideas than a dozen. So as long as you're aware of the ricks, it can really pay to be "overweight" on your best ideas.
We can argue whether Berkshire Hathaway itself is a "buy," but there's no denying that we can all profit from Buffett's wisdom. Learn from the man himself and try to adapt his principles to form a sound, profitable investing strategy.
In short: Buy well-managed companies with wide moats, understandable business models, and in industries that you know well.