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Warren Buffett's Single Most Important Piece Of Advice For Stock Market Investors

Published 5/10/08 (Modified 3/8/11)
By MoneyBlueBook

Most investors are familiar with superstar investment guru and easy going philanthropist Warren Buffett. How could you not? After all, he's the single richest billionaire in the entire world and one of the most influential value focused investors. While the wealth snapshot order has swapped places a few times, at least on this recent Forbes ranking of the world's richest billionaires, Warren Buffett is seated at the very tip of the money stacked totem pole, surpassing even Microsoft uber-geek and fellow billionaire, Bill Gates. But to label him a mere superstar investor would seem to dilute the sophistication of a man who spent a life devoted to a uniquely patient and value minded, get rich slowly type approach to building long term wealth. Warren Buffet is not your typical get rich quick financial motivator, but one who regularly preaches patience, with a keen eye for the undervalued potential of possible long term investments. The Oracle of Omaha, as Buffett is often fondly referred to today, is also the chairman and CEO of Berkshire Hathaway, the corporate manifestation of his immense and massive self made wealth, despite otherwise living and practicing a life of true humility and frugality.

Despite his tremendous wealth, Warren Buffett is also one of the most generous financial figures in the world in terms of how much he has contributed and donated back to society through charitable causes. A few years ago, he gathered up the bulk of his $40 something billion fortune (at the time), and made the decision to donate his money to the Bill Gates and Melinda Foundation as well as to a few other notable charities dedicated to the improvement of health and education in the United States and around the world. How's that for enlightened and compassionate capitalism? Rather than spend his vast wealth on fancy cars, $2 billion dollar homes, or on over-the-top accessories that even hip-hop rappers would envy, Warren Buffett chose to live a relatively frugal life comprised of smart financial planning and wise long term investments that rely heavily on value choices. As a staunch supporter of wealth redistribution and progressive tax policies that favor the poor, he is also one of the most down to earth CEO business men out there - and yes, that's him playing his quirky but famous ukulele in the picture.

So How Did Warren Buffett Become So Rich, And What Is His Single Most Valuable Piece Of Investment Advice For New Investors?

I've read Warren Buffett's works and listened to him speak on Youtube, and I've come to greatly admire the man. For those that want to emulate his approach to investing and replicate the secret of his success to long term investment growth, his method can easily be summed up in a few short sentences. It is a concept all long term value investors have known all of their lives, but sometimes it takes a great role model to sum it up through a few inspiring words:

"Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

- Warren Buffett, 2001.

The Oracle of Omaha's way of creating wealth has always been making value centered financial decisions based on principles of frugality and longevity. His ability to continue investing until his 70's (and hopefully much longer into the future) have enabled him to practice his long term strategy to its full potential. But his tremendous financial success has always been his ability to channel and harness the eternal capitalistic concepts and emotions of human fear and greed. By playing on and understanding the counter correlation between fear and greed, Buffett has been able to shape his outlook to better determine when a presented opportunity represents one that's worth taking and when it merely represents a potentially risky financial bait that must not be succumbed to. Thus when the stock, financial, and real estate markets are dropping and everyone is hastily running into the hills for their financial lives, Buffett sees an opportunity. But when prices are soaring and flying high - encouraged by euphoria and near unanimous over-optimism and exuberance about future prospects, Buffett clenches down and exercises extra caution.

Learn To Invest Like Warren Buffett By Understanding The Interplay Between Investment Fear and Greed

For capitalism and democratic concepts of wealth creation to thrive, there has to be an ultimate driving force - and that is greed. Greed is good, and as one well known movie put it - greed captures the essence of the evolutionary spirit and it works. There is nothing inherently wrong with greed as long as it can be properly channeled into a powerful motivating factor to achieve success. But greed has its place - and so does fear. There is a proper time and place when both greed and fear should be acted upon. Upsetting the proper dynamic between the two capitalistic emotions has the potential to lead to disastrous financial results.

Warren Buffett truly understood human nature and the inherent lemming pack mentality that curses most individual stock market investors. When we see a particular financial investment take off and expand two or threefold in a short period of time, we immediately become enraptured over the financial potential, and our greed induced instincts cause us to blindly pursue the investment bandwagon. It is in our very nature to do so. That is how stock market bubbles and even real estate bubbles are formed - through the unwavering lemming effect whereby greedy investors join the rapidly expanding investment pyramid until the base comprised of new entrants can no longer sustain the prices and valuations at the top.

So to succeed financially in the spirit of Buffett's approach, one has to obtain a more prudent, long term, value-based opportunity outlook. When stock prices are low and dropping, fear causes the majority of people to want to escape and pull their money out of the market in instinctive response. When the markets are seeing red and valuations are dropping, the tendency is to pull your money out of fear. But Warren Buffett sees this moment of fear as the ultimate chance for greed to triumph in the long term. It is not about timing the market, but about looking for the potential upside. When the market has tanked or is tanking, there is much higher potential upside. For undervalued investments, Warren Buffet would see this as the perfect opportunity to take on new positions for the long haul - particularly when the stock or fund fundamentals are sound.

On the flip side, when the entire market is in consensus that a particular investment ought to keep soaring and continue on its upward trajectory, in Buffett's eyes, that is when cooler heads must prevail and caution ought to be taken. When everyone is in near unanimous agreement that stock prices should keep going higher, the potential for a massive reversal of potential is much greater. When others are greedy, that is when you must exercise fear as a counter intuitive response to the masses. The potential downside at that point is much greater and it's likely the time to exercise greater restraint. Steps to protect oneself could be to purchase options to hedge against downside risk or to limit one's investments to less volatile positions.

Thus, if you want to invest like Warren Buffett, heed his most important advice - invest and seek out opportunities when there's blood on the streets, but hold your cards closely and guard yourself when everyone else seems to be ebullient about financial prospects. It's counter intuitive to human nature, but it's the perfect balance and manipulation of fear and greed. Learn to invest in long term value sectors using low expense broad market Exchange Traded Funds (ETF) and low cost mutual funds. Pick out a general low cost online discount broker or open a Roth IRA, and buy and hold investment positions that you believe will grow in the long term, and finally, resist the urge to constantly check your stock prices and bail at the first bump or trouble. Think long term, not short term.

Invest In Value For The Long Term and Understand That Stock and Real Estate Markets Will Naturally Rise and Fall Over Time

Inevitably and invariably, markets ebb and flow, and stock prices never maintain their upward trajectory forever, but at the same time, they also never head downward forever. So long as one maintains a long term investment outlook based on the understanding of fear and greed, we can all learn to profit like Warren Buffett has over the years. Buffett was able to make smart value based investment decisions because he had a long term opportunistic approach to investing. When he acquired control of a simple textile company called Berkshire Hathaway in 1965, he used that company as his primary investment vehicle to acquire and invest in companies that he understood, and retained management services of those he trusted. The key was that he held on. He did not attempt to outplay the market or try to time the market, or guess when he should exit or enter the market. He simply remained patient and sought out opportunities when others were fearful and exercised extra caution when others were greedy.

When the entire world was enraptured with the dot com craze from 1999 to 2001, Warren Buffett was ridiculed for ignoring and failing to cash into the high flying technology stocks that seemed to triple in valuation overnight in leaps and bounds. During this high flying dot com era, Buffett continued to invest his company's assets towards acquiring old fashioned but valuable investments such as carpet cleaning businesses, roofing enterprises, furniture rental stores, and boring paint making companies. When the stock market finally plummeted and self imploded due to gross over valuation, Buffett's company was one of the ones that remained unscathed and has continued to prosper since then.

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14 Responses to “Warren Buffett's Single Most Important Piece Of Advice For Stock Market Investors” 

  1. G.L. says:

    Great to see another Buffett fan! :^D Have you reda his (unofficial) biography "Warren Buffett: the making of an American capitalist" by Roger Lowenstein? It's a great book and well worth reading. Buffett will publish his autobiography (ghost-written, of course) later this year, and his second-in-command Charlie Munger (a genius in his own way) has a brilliant book called "Poor Charlie's Almanack" which is a must-have for all investors, even though it has a hefty price tag. :^)

  2. Raymond says:

    GL,

    I haven't read the book, but it looks very promising. I'm definitely a Warren Buffett fan. It's rare you find someone with such an admirable mix of wealth and humility. True anti-lemmings always garner my respect.

  3. Good Stock To Invest In says:

    Hi,
    People always invest in a stock market with the hope of getting huge returns. So they look for some stock tips which would help them in getting higher profits. Thank you for the information.

  4. How to invest in stocks says:

    Warren Buffett's is great adviser of stock market. He had written several tips how to invest money in stock market in smart manner.

  5. Techzone12 says:

    The key to Buffet success in my opinion is knowing that he can not know the future. So he would use what he knows now, rather than trying to predict the future. Being greedy when others are fearfull is not easy to do. You also have to be selective. People are fearfull of financial stocks right now, but I don't think Buffet is in a hurry to buy them. Because there is too much risk. Too many aknowns.
    Another concept is to learn how to preserve capital. You shouldn't take too much risk, where you would be wiped out (if things go wrong). If you take too much risk, in anticipation of big rewards, then you are gambling, not invetsing. If you become too greedy as to demand high returns from investments, then you are more likely to lose everthing.

  6. Raymond says:

    Techzone 12,

    Have you read "A Random Walk Down Wall Street", written by Burton Malkiel? It's one of the recommended books in my best personal finance book blog post. Basically, the gist of the book review is that a single blindfolded monkey has just as good of a chance at picking the top performing stocks of the future as a platoon of Harvard educated MBA's and financial experts. It's a bit extreme, but well worth a read. Pretty thought provoking.

    Sometimes I do wonder if there is much neglected truth in this random walk theory of stocks - that stock performance truly is truly irrational and random in nature, such that it's nearly impossible to predict its movement, both short term AND long term.

  7. Micaiah2004 says:

    Thank you for the article. Using the Fear-Greed continuum, it allows for analysis of "sentiment". Today, there is some fear but not the wet your pants fear that surrounds true serious correction. Likewise, although much speculation has been wrung out of the mkts, there still is a good residue left in terms of greed/speculation/premature bottomfishing. So Greed is somewhat there yet. What does this portend? As for the mkt, it will haltingly go up yet in high volatility until the
    real capitulation correction arises, then FEAR with be on the high level and GREED squeezed out of the mkt, and it will be time to buy...but that is still down the road yet.

  8. Techzone12 says:

    Did he rush to buy stocks of Bear Sterns or Coutrywide? There is difenitly a lot of fear there. But apparently he is not in a hurry to buy. Why?
    In my opinion, it is becuase there is way too much risk involved.
    Right now, There is some fear in the Market in general, but there is no panic yet. When there is panic, you are going to have a stampede to the exit door. This is the fear that Warren is talking about. Every stock will suffer. Warren, will go and pick and choose the ones that, he thinks, are sound businesses. Stocks that are on sale, and in his opinion, are not justified to go down. This is far from being an easy task!!

  9. Raymond says:

    The reality of long term investing is that no one can really predict the short term direction of the markets at any given time. Not even so-called financial gurus like Warren Buffett are endowed with those powers. During the current 2008-2009 financial collapse, even Buffett's portfolio and his Berkshire Hathaway company have taken severe punishment dealt out by the current economic recession.

    But while short term uncertainly abounds, there is always long term profit and bets to be had. I'm sure Warren Buffett knows that and is steadily placing his wagers for the next few decades. If he is no longer able to enjoy the ultimate fruits of his successful investment choices today, his estate will likely reap the gains many years down the road. Just a little financial mumbo jumbo philosophy.

  10. Draco says:

    Amen to that! Warren Buffett may not always be right - investment wise, but the man is a sage when it comes to wisdom. It's almost always true - it's best to "Be fearful when others are greedy and greedy when others are fearful"

    ....absolutely without a doubt, the most crucial investment advice anyone can ever give. College and university investment courses should start this at the beginning of every class. Finance professors ought to start the school year preaching this mantra more.

  11. John Saari says:

    Hello Mr. Buffett I just saw your interview on TV. You are assuming a little too large of a responsibility. Ease-off. A good idea to chew on: What does a Society pay their garbage collectors?
    John Saari Wexford County Commissioner
    P.S. Work at the smallest mangeable.......

  12. John Saari says:

    Mr. Buffett Can you please tell me why you don't create a ground swell. We need gov represented by the majority. Gov is much too large. Pick the most easily accomplished change and get a lot of us to agree. JohnS

  13. Saifullah khalid says:

    Mr.Buffet's theory of investment is no doubt a great tip for investers.

  14. FinReport says:

    Warren Buffett is one of the best investors and the richest men in the world. I definitely can applause his work. really it is good to know the investment strategy of this businessman.

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