Warren Buffett's 5 Rules For Investing

Warren Buffett's 5 Rules For Investing

Fortune Magazine has an excerpt from Warren Buffett's always-anticipated annual letter to Berkshire Hathaway shareholders.He discusses two past property investment he had made. The first was a 400-acre farm in Nebraska, which he paid $280,000 for in 1986. The second was retail property near New York University in 1993.

Both investment were made after prices collapsed.

"Income from both the farm and the NYU real estate will probably increase in decades to come," he said. "Though the gains won't be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."

Buffett bulleted five fundamentals of investing, which we paraphrase:

"You don't need to be an expert in order to achieve satisfactory investment returns." But Buffett also warns that the investor should recognize her limitations and "keep things simple.
"Focus on the future productivity of the asset you are considering." Buffett notes that no one can perfectly forecast the future profitability of an investment. "[O]mniscience isn't necessary; you only need to understand the actions you undertake."
"If you instead focus on the prospective price change of a contemplated purchase, you are speculating." Buffett has nothing against price speculation. But he emphasizes that it's important to be able to know the difference between investing for the productivity of the asset versus investing on hopes that the price of the asset changes.
"With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays." In other words, focus on the long-run.
"Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important." So mute CNBC, Bloomberg TV, and Fox Business. Unless Warren Buffett comes on.

Buffett open this excerpt with this quote from his mentor Columbia University finance professor Ben Graham: "Investment is most intelligent when it is most businesslike."

Read the whole except at Fortune.CNN.com.

Some classic Buffet quotes on investing:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."

"After all, you only find out who is swimming naked when the tide goes out."

"The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they're on the operating table."

"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

Source: Business Insider

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