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

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.

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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.

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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.

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