True geniuses tend to make things simpler, not more confusing. Buffett is no exception.
Buffett simplifies investing down to the following:
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
That doesn’t sound overly complicated – because it isn’t. Click here to see 17 of Warren Buffett’s best quotes analyzed.
Buffett says there are 3 things that make a successful investment:
1. Good stocks (strong competitive advantage)
2. Good times (low prices)
3. Stay with them as long as they remain good investments (let them compound your wealth)
You don’t have to be a genius to follow this plan…
“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ”
– Warren Buffett
Warren Buffett’s mentor was Benjamin Graham – the father of value investing. Three of Graham’s ideas greatly impressed Buffett. He went on to say that:
“(He) believes those ideas, 100 years from now, will be regarded as the three cornerstones of sound investing.”
Warren Buffett’s 3 cornerstones of sound investing are:
1. Look at stocks as small pieces of a business
2. Look at market fluctuations as your friend rather than your enemy
3. Margin of safety
This article takes a deeper look into each of these 3 investing cornerstones.
Look At Stocks as Small Pieces of a Business
For many (if not most) individual investors, the stock market is a large virtual casino.
If you pick the right 1, 2, 3, or 4 digit ticker symbol, you could double or triple your money! If you pick the wrong one, you could lose it all.
It’s easy to see why…
Stock quotes are updated in (nearly) real time, giving markets the same frenzied tempo as you see on a spinning roulette wheel in Las Vegas Casino.
You can pull up lists of the top performing stocks every day to see the ‘big winners’ and ‘big losers’
If only you invested in the big winners every day… You’d be a billionaire in no time!
This has led to the prevalence of penny stocks. A stock could be worth $0.01 today, and go to $1.00 tomorrow – giving you 100x returns in a day! Of course, this rarely (if ever) happens. Penny stock sites like to hype up your brain with the (largely false) idea of big returns that are easy to get.
Informed investors know better.
Traders with a gambling mentality trade very frequently. Who stands to gain from rapid trading?
Wall Street firms in general, and discount brokerages in particular.
The truth is that discount brokerages are worth billions because investors trade so frequently. The less you trade, the more money remains in your account (where it belongs) to compound, and the less money goes to financial institutions. Click here to learn more about Wall Street and investing fees.
The less you trade the better your investments will do. This is not conjecture, it was proven by analyzing thousands of individual accounts at a discount brokerage over a period of years.