Warren Buffett: the 3 vital investing rules the world’s best investor follows

Passive income is the dream of most retail investors, but how are we supposed to build it for ourselves? Warren Buffett may have the answers. James Reynolds outlines the Buffett investing strategies he follows to build his portfolio.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett is widely regarded as the greatest investor of all time. In the 1980s, he became a billionaire, and his tenure at Berkshire Hathaway has seen its A shares grow in value to almost $400,000. What lessons can we take from him? Actually, quite a few. Throughout the years, Warren Buffett has offered a thorough overview of how he makes the types of investments that yield double- or triple-digit returns in interviews, books, and letters. Here are some of the most vital rules he follows to help ensure success.

Warren Buffett says “be patient

Buffett believes that patience is the most important value an investor can have. There may be a fantastic firm out there, but if the stock price is too high, it’s best to wait for it to fall. There may be a market crash, and your assets may lose value, but if you wait long enough, the price may rise again.

Even if it doesn’t appear so, the stock market is continually presenting fresh chances. All we really have to do is wait for them.

Focus on your circle of competence

It is vitally important that I understand the business I’m investing in. Warren Buffett has been criticised for losing out on the boom in tech companies over recent decades. However, he has always stated that he does not understand how those firms create money and hence does not invest in them. That’s not to imply Facebook or Google are untrustworthy firms; it’s just that he wouldn’t know the difference between a good and a bad investment. For the same reason, I avoid investing in banks, but I do invest in renewable energy.

As we gain confidence in our investing, it is always a good idea to attempt to learn more about other companies and sectors. But Buffett encourages us to focus on what we currently know well. In an interview with CNN, another well-known investor, Peter Lynch, reiterated a similar stance, “I know restaurant managers who invest in IBM, but I always ask why they don’t invest in restaurants. They know how the business works. They know if a restaurant is profitable and what sorts of challenges they face”.

Ignore the share price. What’s its value?

Warren Buffett is a firm believer in the necessity of sound business principles. Observing a stock’s rise and fall is, for the most part, frustrating, draining, and unproductive. Many inexperienced investors make the mistake of purchasing when the price rises and selling when the price falls. However, there are a multitude of other factors that influence share prices. Not only is it hard to forecast these fluctuations, but they typically reveal next to nothing about a company’s health.

If, on the other hand, an investor learns how much debt a firm has, how much cash it has on hand, and whether it makes a consistent profit, they will be in a much better position to determine whether the company is healthy or not.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Reynolds 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Growth Shares

3 things I learnt from Warren Buffett’s annual shareholder letter

Jon Smith reads the letter Warren Buffett just put out and provides his key thoughts and summary of the investing…

Read more »

View over Old Man Of Storr, Isle Of Skye, Scotland
Investing Articles

2 high-yield FTSE 250 shares I’d buy now – and 1 that I wouldn’t

This writer considers a trio of FTSE 250 shares with attractive dividend yields and explains which two he would buy…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

In a cyclical downturn, is there a buying opportunity in Croda shares?

With a positive sales outlook for 2024, is there a buying opportunity in Croda shares ahead of a potential recovery…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

£20,000 in savings? Here’s how I’d aim for £14,710 a year in passive income

With spare savings, this Fool would start generating passive income for a more comfortable retirement. Here he details how he'd…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d try to turn that into £581 a month of passive income

Relatively small investments in high-yielding stocks can grow through the power of dividend compounding into significant passive income.

Read more »

Photo of a man going through financial problems
Investing Articles

These are the FTSE’s biggest dogs over the last year!

The FTSE 100 has fallen far behind other major market indices over the past 12 months. However, these three sliding…

Read more »

Investing Articles

My top 3 stock market lessons from the Nvidia volcano eruption

Can we learn anything from the explosive rise in Nvidia's share price? Here are three Foolish reflections from this stock…

Read more »

Abstract 3d arrows with rocket
Investing Articles

Is boohoo the best near-penny stock to buy today?

This Fool asks why the boohoo share price has collapsed and whether now might be a good time to invest…

Read more »