Warren Buffett: pearls of wisdom from the world’s greatest investor

Woodstock for capitalists

Berkshire Hathaway, managed by G.O.A.T. investor Warren Buffett, has delivered unbelievable returns over the years. Originally a struggling textile firm, Buffet began investing in the company in the 1962, and by 1965, was its sole owner. Realising that textiles was a dying business in the US, he used the company’s cashflow to start investing in insurance, the premiums of which he then used to buy stocks and bonds. And so began the legend. Ever since, he has invested widely in the US stock market across industries from banking, media, consumer goods, insurance, and more, and gone to fully own many of them using Berkshire as the holding company. 

To put his and Berkshire’s success into context: if you had invested $100 in Berkshire shares in 1965 when he fully acquired the company, today you would have a supremely neat pot of nearly $2.6m.

It’s why such frenetic excitement builds at this time of year: Berkshire’s annual general meeting (AGM). Often described as ‘Woodstock for Capitalists’, tens of thousands of keen fans descend on a stadium in Omaha, Nebraska, to hear what the world’s greatest investor and his long-time business partner Charlie Munger think on a range of investing topics, from the economy to stock markets, individual stocks, other entrepreneurs, and more exotic types of investments such as cryptos. 

As investors, what we can learn from Warren Buffett

Buffett has a way with pithy observations and statements – as can be seen above – which many investors find useful as pearls of wisdom by which to set their investing mantra. Here, Laith Khalaf, our very own investment guru at stockbroker AJ Bell, looks at six of his most useful.

1. Be long term with your investments

Warren says: ‘Our favourite holding period is forever.’

“One of Warren Buffett’s most often quoted proverbs is that his favourite holding period is forever. The idea that when you buy stocks or funds you should do so with the intention of never letting them go is a good one, not least because short termism can lead to investment losses and excessive trading fees.

“However not even Warren Buffett can claim to adhere to this maxim totally, as he has sold plenty of stocks in his lengthy and illustrious career. Private investors should also be willing to sell investments if they believe their best days are behind them. Perhaps the words of the economist John Maynard Keynes may also be useful qualifiers here; ‘when the facts change, I change my mind’.”

2. Choose high conviction active funds

Warren says: ‘Diversification is protection against ignorance.’

“This is a somewhat extreme position expressed by Buffett, and one he doesn’t actually follow himself seeing as Berkshire Hathaway runs a diverse, if compact, portfolio of business and stocks. Diversification should be a high priority for private investors, but there does come a point when it stops being diversification and veers into being ‘diworsification’.

“Probably the most egregious example of this is closet tracker funds, which largely hug the index but charge active fees for doing so, leading to long term underperformance. Investors holding such closet trackers should consider switching to low cost tracker funds or high conviction active funds.”

3. Use trackers

Warren says: ‘Both large and small investors should stick with low cost index funds.’

“This is a bit of a puzzling statement coming from a man who runs a highly active portfolio on behalf of investors, with great success. Nonetheless there is sense in some investors sticking with tracker funds, especially those with little experience or those who simply don’t want to spend time picking good active managers.

“Buffett does also acknowledge a place for active managers too though, saying in almost the same breath ‘there are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches.’ Investors don’t have to choose exclusively between active and passive funds, they can mix or match, or indeed switch from one strategy to the other as they gain experience or branch out into new markets.”

4. Relish your dividends

Warren says: ‘We relish the dividends we receive from most of the stocks that Berkshire owns, but pay out nothing ourselves.’

“Investors ignore dividends at their peril. They are an important function of long-term returns from the stock market, especially in the UK, which is home to many high yielding companies. Berkshire Hathaway doesn’t pay any dividends, on the basis Buffett thinks he can always find a good home for that money to produce future growth and income. Private investors can take the same approach by rolling up the dividends from their portfolio, either reinvesting them in the same stocks, or reallocating them to other investments.”

5. Don’t invest in what you don’t understand

Warren says: ‘Risk comes from not knowing what you’re doing.’

“This is a really important bit of guidance which can prevent you losing money and feeling a nasty sense of buyer’s remorse to boot. If you don’t understand something, then you shouldn’t invest in it.

“At the same time, it’s important to recognise that no-one has every single bit of information available about prospective investments, so a balance has to be struck here in which investors gather enough information to know the conditions under which their investment is likely to perform well and poorly. And everyone makes mistakes, even professional money managers, so simply learn from these for next time and you will become a better investor.”

6. Avoid crypto

Warren says: cryptocurrencies are ‘probably rat poison squared’… ‘I can say almost with certainty they will come to a bad ending.

“Don’t expect to see Bitcoin in Berkshire Hathaway’s portfolio any time soon, and if you rate the words of Warren Buffett, you best steer clear yourself. Crypto is going through a bit of a rough patch, though 2023 has been kind to it so far. There may well also come another time when crypto soars in value and investors get tempted to buy in.

“But crypto has few, if any, genuine economic uses apart from concealing criminal activity, and its long-term adoption by consumers, businesses and investors as a medium of exchange or a store of value is highly speculative. Those who do want to take a punt on its future should do so only with a small amount of money they can afford to lose.”

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Marcus De Silva
Date published:
12 / 05 / 2023
Reading Time:
4 minutes