The Best Advice Warren Buffett Ever Gave on Choosing the Right Investments

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The Best Advice Warren Buffett Ever Gave on Choosing the Right Investments

Matthew Cavanaugh/EPA / Shutterstock / Matthew Cavanaugh/EPA / Shutterstock

Investor Warren Buffett bought his first stock at age 11 and purchased his first lot of real estate at 15. Today, the Oracle of Omaha has a net worth of $147 billion and a reputation for identifying promising

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Buffett has generously shared his expertise over the years, offering his advice in interviews and letters to Berkshire Hathaway shareholders.

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Buffett isn’t the kind of go-go-go investor Hollywood likes to profile. He doesn’t buy low, sell high, and buy low again before lunch. Instead, he researches companies’ operations, news, and balance sheets and invests in those he believes will do well in the long term.

In his 2022 letter to shareholders, he wrote:

“We own publicly traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. Charlie [Munger] and I are not stock-pickers; we are business-pickers.”

As Buffett’s business partner for nearly 50 years, Munger was instrumental in helping Buffett identify good deals.

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During the 2008 economic recession, Buffett reminded his shareholders of the importance of value. Although the value of his investments had dropped along with the market, he didn’t worry. He even used his purchasing power to buy more of certain stocks.

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down,” Buffett said.

Of course, Buffett knows that not every low-priced stock is a good value. He quotes his mentor, Ben Graham, who said, “Price is what you pay; value is what you get.”

Finding those valuable purchases requires research and a commitment to finding good companies, not just cheap stocks.

One of Buffett’s hard-and-fast rules is only investing in businesses he understands. He tracks a company over time to see how it’s doing and whether he believes it will continue to grow.

Buffett understands a great deal about many kinds of businesses, but he believes his approach works even for those without 60-plus years of investment experience. As long as you invest in businesses you understand, he says, you’re on the right track.

As he wrote to shareholders in his 1996 Berkshire Hathaway letter:

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“You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important. Knowing its boundaries, however, is vital.”

Avoiding an investment you don’t understand can be just as valuable as saying yes to one you do.

Buffett picks his stocks because he knows the business. He also knows that not everyone is an expert, so he recommends low-cost index funds to most non-professionals. He’s said it in no uncertain terms multiple times. In his 1996 letter, he wrote, “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results … delivered by the great majority of investment professionals.”

He said it again in 2013. “The goal of the non-professional should not be to pick winners — neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”

An index fund is an investment product that tracks the performance of a market index, which measures the performance of a group of assets. The S&P 500 tracks the 500 highest-valued equities in the U.S. market. S&P index funds divide investments among those stocks, each in a different way.

Warren Buffett plays the long game. He believes in the market’s general upward trajectory, and more importantly, he thinks that trend is much more important than daily price quotes.

As he told Berkshire shareholders in 2016, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Buffett trusts the market’s long-term growth, including indices like the S&P 500. He’s made his billions buying good companies that can ride that growth, and he believes others can do the same.

In short, if you want to invest like Buffett, buckle in for the long haul.

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