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Temperament Over Intelligence: The Real Secret to Buffett's Investment Success

By sagebytes —

Warren Buffett's Investment Best Practices

Distilled from the 2014 Berkshire Hathaway Annual Letter

Core Investment Philosophy

  • Buy wonderful businesses at fair prices, not fair businesses at wonderful prices
  • Focus on businesses with durable competitive advantages that give significant pricing power
  • Long-term perspective is essential: "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes"
  • Ensure companies have trustworthy, skilled, and energetic management who love their business

Capital Allocation Principles

  • Maximize long-term intrinsic value, not short-term earnings
  • Maintain exceptional financial strength with ample cash reserves and minimal debt
  • Be prepared for market downturns and capitalize on opportunities when others are fearful
  • Avoid bureaucracy that stifles effective capital allocation

Stock Market Wisdom

  • Price volatility is not true risk for long-term investors
  • The real risk is permanent loss of capital or investing in businesses with deteriorating fundamentals
  • Diversification is sensible for those who don't know how to analyze businesses
  • Over long periods, equities have proven safer than cash-equivalent/currency-denominated investments
  • The market is a voting machine in the short term but a weighing machine in the long run

Common Investor Mistakes to Avoid

  • Leverage: "Borrowed money has no place in the investor's toolkit"
  • Market timing: No one can predict market movements consistently
  • High fees: Most investment "helpers" are better at generating fees than returns
  • Speculation: Buying at elevated prices turns sound investments into speculations
  • Overtrading: Active trading destroys the returns that patient investors would otherwise enjoy

Sound Investment Practices

  • Be patient and wait for the right opportunities - "Lethargy bordering on sloth"
  • Think independently rather than following the crowd
  • Focus on intrinsic business value, not market fluctuations
  • For most investors: consider low-cost index funds held over decades
  • Add to your investment knowledge through continuous learning and reading

Temperament Over Intelligence

  • Emotional stability is more important than high IQ in investment success
  • Avoid self-delusion and maintain rational thinking during market extremes
  • "Be fearful when others are greedy and greedy when others are fearful"
  • Remember: "2+2 will always equal 4" despite what market promoters claim

"The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities—Treasuries, for example—whose values have been tied to American currency." - Warren Buffett