scorecardresearchWarren Buffett's three golden rules for investors

Warren Buffett's three golden rules for investors

Updated: 15 Sep 2023, 12:00 PM IST

  • Legendary investor Warren Buffett imparted three crucial investment lessons in Berkshire Hathaway's annual letter this year. In case you missed, here are the lessons for you.

Warren Buffett

Warren Buffett

Warren Buffett, often hailed as the "Oracle of Omaha," has been at the epicenter of Wall Street's admiration for his remarkable ability to recognise and harness the power of long-term investments. Taking the helm of Berkshire Hathaway in 1965, Buffett's investing acumen has returned an awe-inspiring 3,787,464%—nearly 20% compounded annually. This has left the S&P 500's performance, impressive as it is, trailing in its wake.

Picking the Winners and Standing by Them

Buffett's strategy has always emphasised the significance of being able to discern potential winners and backing them to the hilt. Reflecting on investments from decades past, he highlighted the purchase of 400 million Coca-Cola shares in 1994 for a whopping $1.3 billion. Fast forward to the end of 2022, this investment matured to an astounding $25 billion with an additional annual dividend of $704 million, rendering a 54% yield on the original amount.

Similarly, Buffett's foresight in investing $1.3 billion in American Express in 1995 paid off handsomely. As of last year, this stake amounted to $22 billion, accompanied by an annual dividend of $302 million, marking a 23% yield.

These decisions illuminate Buffett's philosophy: "The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders."

The Magic of Long-Term Commitment

Buffett's investment journey speaks volumes about the merits of staying committed for the long run. Beginning his investment ventures at a tender age, he remained steadfast in the market well into his golden years, allowing his investments the time and space to compound and flourish.

An example Buffett often alludes to is the exponential growth witnessed by investing just $1,000 initially and diligently adding $500 monthly. Even with a modest annual return of 8%, such a strategy would lead to an accumulation of half a million dollars by the 27th year. The beauty of compound interest means this amount would double and triple in the subsequent decades, showcasing the sheer power of longevity in the market.

The Advantage of Liquid Capital

One often-overlooked facet of Buffett's success is Berkshire Hathaway's consistent liquidity. Thanks to its diverse investments in insurance giants like GEICO and General Re, there's a continual influx of cash from premiums. This liquidity serves as a war chest, allowing Buffett to seize opportunities as and when they present themselves.

Taking a leaf out of Buffett's book, investors would do well to consistently allocate a portion of their earnings to investments, ensuring they always have the liquidity to pounce on lucrative opportunities, especially during market downturns.

In Conclusion

Investment, as Buffett continually reiterates, is not about short-term gains. It's about recognising potential, nurturing it, and having the patience to see it come to fruition. The journey will have its fair share of highs and lows, but armed with these timeless lessons from Buffett's playbook, the path to long-term wealth creation through the stock market becomes clearer.

(Several parts of the text in this article, including the title, were generated with the help of an AI tool.)

Key lessons from 'The Psychology of Money'. 
First Published: 15 Sep 2023, 12:00 PM IST