The Three Deadly Sins of Investing According to Warren Buffett
Investment Best Practices from Warren Buffett's Letter
Focus on Business Fundamentals, Not Market Movements
Buffett emphasizes viewing stocks as "fractional ownerships in businesses" rather than trading vehicles. He has maintained this perspective since age 19, when he read Ben Graham's "The Intelligent Investor." This approach ignores chart patterns, short-term earnings estimates, and broker opinions.
Avoid the Three Major Investing Pitfalls
- High costs - Excessive trading and overspending on investment management erode returns
- Following fads - Making decisions based on tips rather than thorough business evaluation
- Timing the market poorly - Entering after advances and exiting after declines
Practice Disciplined Underwriting and Patience
The National Indemnity example demonstrates how maintaining discipline during industry downturns yields superior long-term results. When competitors chase volume by underpricing, the wise investor refuses to compromise standards despite shrinking volume, waiting for favorable conditions to return.
Understand True Value vs. Price
Intrinsic value matters more than book value or market price. Berkshire's long-term success came from businesses worth more than their book value, even when year-to-year market performance fluctuated dramatically.
Be Fearful When Others Are Greedy, Greedy When Others Are Fearful
This contrarian principle helps avoid market bubbles and take advantage of downturns. Buffett admits failing to act on this principle during the "Great Bubble" despite recognizing overvaluation.
Look for Sustainable Competitive Advantages
Firms like GEICO demonstrate how structural advantages (direct-to-consumer model) create lasting value through lower costs and better customer experience.
Maintain Rational Compensation Structures
Logical compensation aligns management with long-term shareholder interests, including appropriate option pricing and restrictions on quick stock disposal after exercise.
Consider Currency and Macro Risks
While acknowledging macro-economics is challenging, Buffett warns against ignoring structural economic imbalances (like trade deficits) that can significantly impact investments over time.
Prioritize Quality of Management
The right CEO is critical. Seek managers who operate businesses "as if it were the only asset their family will own over the next hundred years."
Remember: Excitement and Expenses Are the Investor's Enemies
Patient, low-cost investing in quality businesses beats chasing excitement and paying high fees.