Warren Buffett is widely regarded as the greatest stock market investor of all time.
Not only has he built up a net worth of around $80 billion from investing, but his performance track record is second to none.
Between 1965 and 2018, Buffett generated an annualized return of 20.5% for Berkshire Hathaway investors—more than twice the return of the S&P 500 index.
So what can we investors learn from Mr. Buffett?
Prioritize Capital Preservation
One of the keys to Buffett’s success is that he has always placed a strong focus on capital preservation.
Indeed, Buffett has often said that the most important rule when investing in the stock market is “Never lose money.”
The logic behind this is simple: Big losses can really set you back.
Lose 50% of your capital on a speculative growth stock, and you’ll need to generate a return of 100% just to break even. Lose 80% of your capital on a stock, and you’ll require a return of 400% to get back to even.
The lesson here is that it’s important to focus on risk, as well as reward, when deciding where to invest.
Focus On Quality
Buffett is often viewed as a value investor because he likes to buy companies when they’re trading below their intrinsic values. However, a closer look at his investment strategy reveals that he also focuses on quality.
Buffett likes to invest in companies that have a strong competitive advantage, or “economic moat.” This helps them protect their market share and profitability.
He also seeks out companies that generate high returns on equity. This shows that they are effective at generating profits.
Additionally, he prefers companies that have low debt levels, as they are less vulnerable during economic downturns.
So, while valuation is important to Buffett, it’s not the sole focus of his investment strategy. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he says.
Keep It Simple
Another great lesson from Warren Buffett is that you don’t need a complicated investment strategy to be a successful investor.
Look at Buffett’s portfolio and you’ll see that he owns many companies that have relatively simple business models, such as Coca-Cola, American Express, and Apple.
Investors today pursue all kinds of complex investment strategies. However, a simple buy-and-hold approach can be a highly effective way to generate long-term wealth.
Compound Your Way To Wealth
Finally, another timeless lesson from Buffett is that compounding your returns over the long term can deliver phenomenal results.
At his annual Berkshire Hathaway meeting in early 2018, Buffett asked investors to guess how much an investment of $10,000 in the U.S. stock market on the day he made his first stock purchase in 1942 would be worth. The answer? Approximately $51 million.
Compounding is a powerful tool.
In today’s world of around-the-clock financial news, it can be easy to get caught up in short-term developments and to sell when the market is falling. The key, as Buffett shows us, is to ignore the noise and “invest with a multi-decade horizon.”