7 Investing Truths No One Tells You (Straight from Warren Buffett)

Warren Buffett is the CEO of a multibillion-dollar company called Berkshire Hathaway, and throughout his career, he has made hundreds of billions of dollars with his disciplined investment strategies. Buffett's investment strategies are timeless because they focus on investment fundamentals that most new investors are likely to overlook and focus on the fundamentals to avoid the negatives of the value trap. Although most people refer to sayings or quotes, the authentic Buffett method is based on seven little-known strategies of the multibillion-dollar industry that are the best of the best.

These truths illustrate why speculation is a bad practice, why the understanding of investing surpasses the understanding of its constituent parts, and why maintaining a position to capture the value of the investment in the future is more important than the present-day value of that investment in terms of cash. This guide is based on Buffett's letters, interviews, and actions, and it offers a great deal of value on a variety of aspects, including stock market investments. Investing for the first time or improving your investment/ stock portfolio is simple. So, to begin, apply your investment strategies with the utmost confidence, relieve your concerns about the volatility of your investments, and use Warren Buffet's strategies.

Truth 1: Invest Only in What You Understand (Stay in Your Circle of Competence)

When discussing investing strategies, one of the most important pieces of advice given by Warren Buffett is to never invest in a business you do not understand, and that business should go toward the top of the list of priorities. He says this is called staying within your circle of competence. He avoided making investments in companies such as Amazon or Google in the earlier years, as many of his competitors did, as both companies' models and sources of revenue were not easy to understand.

This simplifies and mitigates the potential risk associated with the investment. Buffett avoids making investments in industries he is not comfortable with (including but not limited to: consumer goods, insurance, banking, etc.) and, by doing so, gives himself the ability to plan and predict the success or failure of an investment in the long-term. 

As for the rest of the investors, this would indicate they should avoid making investments in the increasingly popular sectors of cryptocurrency or the more complicated and difficult to understand (biotech or otherwise) investments, as long as they are not able to clearly articulate the answer to the question of how that company generates revenue.

The lessons to be learned from this are simple: knowing a company is more important than having good luck. If the goal is to expand that knowledge even further, doing so, step-by-step, through reading the company’s and/or business’s reports is the best way to go, as opposed to risking that knowledge in the process. This strategy, in addition to many others, is why Buffett has avoided losing billions. This also serves as a powerful example of the knowledge and skill Buffett has in determining the potential success of a business/industry.

Truth 2: Look for Durable Competitive Advantages (Economic Moats)

Buffett not only purchases companies but also purchases entire fortresses. He looks for newer economic models and sources of revenue. He looks for models and types that are more advantageous for the company in the long run, rather than in the short run; these include but are not limited to: very strong/profitable branding, networking, and/or lower operational costs. These types of models will protect the company’s profits for many years.

Buffett's $1.3 billion investment in Coca-Cola has earned him $700 million annually. They've earned him this much because their brand is powerful enough to fend off competition. The brand moat they own is very lucrative. Another example is Apple. Since the time of this investment, Apple's brand has increased to $160 billion. Buffett's investment in the Apple brand, valued at $31 billion, had grown significantly because of the company's customer loyalty.

In Buffet's case, the investment gained value exponentially, contrary to the Apple brand's prior value of $31 billion. The conventional investing method is to find the hottest stocks. The Warren Buffett method is to find the old stocks, the businesses that have endured the test of time. For each company, evaluate its ability to increase prices without the loss of customers. Companies that have strong scale, market switchover, or customer loyalty factors are the ones to invest in.

Truth 3: Prioritize Competent, Shareholder-Friendly Management

Buffett is known for his investment in businesses of solid, strong leadership that treat shareholders like partners. He is very selective of the teams he recruits to manage the businesses. He looks for leaders who encourage the repurchasing of stocks, prompt dividend payoffs, and govern the company as if it were their own. Despite the company having a faithful board of directors, Buffett tends to focus on the company owners.

For investors who understand, Berkshire's consistent winners exemplify the principle of buying what will grow most in value over time. For individual investors, this means reviewing proxy statements and earnings calls. Are executives buying their own shares? Do they emphasize long-term stock performance over short-term, quarterly targets? 

With most Buffett partnerships, investors make money when the executives’ interests are aligned with the investors’ interests, which is another subtle-but-important lesson in stock investing that pays off over the long-term.

Truth 4: Buy at a Discount to Intrinsic Value (True Value Investing)

"It is better to buy a wonderful company at a fair price than a fair company at a wonderful price," says Buffett. He only buys a stock when he believes the market is undervaluing the stock's true value, which he estimates based on intrinsic value (future cash flows, discounted to today's value).

This is the essence of value investing. During the financial crisis of 2008, Buffett bought shares of McDonald's when the price, driven by fear, was below what he considered the company’s true value. His reward was a massive financial gain when the company recovered.

While most investors are focused on price, investing correctly means focusing on value. Buffett's success lies in correctly fitting the parameters of the model that other market participants are using incorrectly. When the market is bullish, his cash reserves keep him from investing. He uses this strategy when the market is positive and prices the way to find the true value, allowing for the use of prices.

Truth 5: Exploit Fearful Markets (Be Greedy When Others Are Fearful)

Buffett once said to “be fearful when others are greedy and greedy when others are fearful.” This type of investing may be uncomfortable for many. When buying stocks, lots of people feel a little uneasy when headlines of a stock market collapse are playing on the news.

Buffett, however, made one of the biggest wins by doing this. Investing billions in the stock market while everyone was losing their heads in 2008 was one of the biggest wins for Buffett. One of the first lessons for the stock market: If you have cash, volatility is your best friend. Great businesses don’t disappear, even if people are panicking.

You can keep cash to invest in stock and keep a list of stocks you might want to invest in. If the stock market becomes extreme (this can happen when there is a lot of panic in the news or if the VIX is extreme), check the stocks you are interested in. Most people will panic and sell off their stocks at this time. Only the people who are doing the right thing by buying stocks will keep their stocks.

Truth 6: Maintain a Long-Term Investment Horizon for Compounding

When asked what the best time to sell stocks is, Buffett said “Never.” To Buffett, stocks are not for buying and selling; they are for ownership. If the stock is great (business), earnings will compound and grow the longer you hold it.

This comes into conflict with the current culture of wanting things to happen immediately. Buffett held Coca-Cola stock for decades and has held Apple stock since it was first made. A lot of the time, the current economic state, elections, or a recession creates panic in the stock market. These things don’t matter when the business is a great one.

The compounding math is clear: 15% annual return means money doubles every five years. With this rule of thumb for the long term, one must look past the daily price fluctuations and instead look at the underlying business. One of the purest tips from Buffett: If you wouldn't hold it for 10 years, you shouldn't hold it for 10 minutes

Truth 7: Focus on Businesses Generating Consistent, Growing Cash Flow

Buffett calls them cash machines -  companies with reliable and growing free cash flow. He is interested in owner earnings, not accounting earnings.

As investors, you should consider the cash flow statement. If cash flow is growing consistently, the business is likely to last. If it has competitive advantages and quality management, it will be able to create self-sustaining wealth. This is the Buffett strategy that differentiates the great picks from the generational assets.

Putting These Investing Truths into Action

Applying rigorous thinking is necessary when considering the seven investing truths. Assess your competency; know your strengths and weaknesses. Study two industries for expertise. Identify market moats and cash flow using publicly accessible company analytics and financial documents. Keep 10-20% cash on hand during turbulent market conditions. 

Buffett’s overarching rule is unbreakable:  “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”

Conclusion

Consider the stock market lessons best learned from Buffett. He has maintained the best stock market performance for over 60 years. His simplistic approach has beaten the S & P 500 time and time again.

You can start utilizing this investing wisdom today. Check your portfolio and see what Buffett would have to say. Read his letters on the Berkshire page; if stock picking is too daunting, start with an S&P 500 allocated index fund. Buffett recommends 90% to an S&P 500 fund for the majority of people.

There is no hurrying true wealth. Investing truths are compounded over time, so stay steadfast and true to the principles. Listening to Buffett rewards true wealth.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.