Warren Buffett isn’t known as the best investor of all time for nothing. He’s turned an initial investment of $100,000 from friends and family in the mid-1950s into a global conglomerate with more than $700bn of assets worldwide, and a personal fortune of $103bn too.
I think every investor can learn a lot from this multi-billionaire’s success. Indeed, his advice has helped me become a much better investor over the years. What’s more, I still haven’t finished learning yet.
Warren Buffett advice
I think one of Buffett’s most important pieces of advice is to avoid losing money. He’s said this is his first rule of investing. His second rule is to “never forget rule one.”
The best way for me to avoid losing money as an investor is to stay away from companies I don’t understand. And it’s not just stocks and shares I avoid if I don’t know how they make money. I’m more than happy to avoid other products as well, such as peer-to-peer lending.
I think it’s far easier for me to stay away from these assets rather than risk losing money by investing in something I don’t understand.
Another piece of Buffett advice that’s helped me become a better investor is to think about the long term-view. He’s always thought in terms of decades when he makes an investment. I certainly follow the same approach. If I’m unwilling to own a stock for at least 10 years, I’ll avoid owning it altogether.
This approach is designed to help me focus on the companies I know and understand. It also helps me avoid being influenced by short-term market movements, which can lead to poor investment decisions.
Buffett also advises investors to avoid borrowing money to buy stocks. I’ve never borrowed money to buy stocks. And it also means I like to avoid companies with high debt levels.
Businesses can sustain elevated borrowing levels, but the fragile tower of cards can come crashing down quite quickly if something goes wrong. It’s challenging for investors to know when something will go wrong and get out before it does. That’s why I like to avoid these companies altogether rather than risk a disaster at some point in the future.
Staying within the comfort zone
These bits of advice from the ‘Sage of Omaha’ may not suit all investor styles. For example, some may be happy investing their money in companies with a lot of borrowing if they understand how the business operates. However, this certainly isn’t something I’m comfortable with.
And that’s another piece of advice from Buffet. Investors should never do something they’re not comfortable with, no matter how big the potential reward. Because the reward is often not worth the risk.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.