Warren Buffett's Greatest Wisdom

Table of Contents
Warren Buffett's Greatest Wisdom Who's Swimming Naked? Buy Wonderful Companies The Best Holding Period Get 10 More Stocks -- Completely FREE!

Warren Buffett's Greatest Wisdom

According to Forbes' latest list of worldwide billionaires, Warren Buffett is worth more than $50 billion. The octogenarians massive fortune was built through Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), the company hes been a controlling shareholder of since 1965. Since that time, Berkshires stock has appreciated nearly 600,000% (no, thats not a typo!) versus 7,400% for the S&P 500 index.

At that rate of return, a $1,000 investment in Berkshire would have become roughly $6 million. Much of the success at Berkshire has been driven by Buffetts uncanny skill as an investor. During his career as CEO, hes made billions for the company and its investors by buying top-notch companies like American Express (NYSE: AXP) and Coca-Cola (NYSE: KO) and holding the stocks for decades. Theres a lot we can learn from Buffett Fortunately, not only has Buffett been one of the most effective CEOs of the modern age, hes also been one of the most transparent. For Berkshire, each year is capped by a letter to shareholders from Buffett that not only details the companys results, but teaches readers general investing lessons in Buffetts down-to-earth, folksy style. Outside of those letters, Buffett is also known for delivering some of the all-time most concise, elucidating quips about investing. In this report, youll find three of Buffetts most insightful pieces of wisdom broken down so you can understand exactly how to apply them to your investing. Youll also find seven stocks you can add to your buy list today using Buffetts insight. If youre ready to dive into the world of Buffett, click below to get started.

Who's Swimming Naked?

You only find out who is swimming naked when the tide goes out. Warren Buffett

Unwise business plans can often lead to huge profits over the short term. When the

Unwise business plans can often lead to huge profits over the short term. When the economy is roaring and everything is moving up and to the right, its far easier for companies to hide dumb, corner-cutting, or even illegal practices as they rake in profits. Eventually though, the environment changes, those ill-advised practices are exposed, and the companies employing them -- and their shareholders -- get punished. Thinking back to the dot-com boom, online grocer Webvan is a perfect example. After pricing its 1999 IPO at $15, the stock traded up to nearly $25 -- up 66%! -- on its first day of trading. So what if the company was losing money, it had a questionable business plan, the economy was booming, and internet stocks couldnt lose! As we know now, it couldnt last. As the stock market boom turned to bust and the economy cooled, Webvans approach to online retailing -- which only led to mounting losses -- left investors cold. Unable to fund its massive cash bleed, Webvan declared bankruptcy in 2001. Of course, we have a plethora of even more recent examples of businesses caught swimming naked thanks to the housing bust and financial-market meltdown in 2008. Chief among those examples is Lehman Brothers, which was an investment bank that was raking it in prior to the crash by employing large amounts of ultra-short-term loans to finance risky, complex real-estate investments. When the market turned, Lehmans lack of swimming trunks was painfully obvious, and in 2008, Lehman filed the U.S.s largest corporate bankruptcy. Buffetts swimming naked quote provides us with plenty of cautionary tales and gives us an idea of companies we might want to avoid investing in. If we flip it on its head, though, it also reveals companies that are great investing opportunities. For example, lets look at the credit crisis again. Lehman Brothers declared bankruptcy, Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) were put into government conservatorship, and Bear Stearns narrowly avoided bankruptcy by agreeing to be bought out by JPMorgan Chase (NYSE: JPM). But Wells Fargo (NYSE: WFC) and U.S. Bancorp (NYSE: USB) both made it through the crisis without reporting a single unprofitable quarter. Though they both accepted government bailout money, its unlikely that either truly needed it. In fact, Wells Fargos chief executive at the time argued vociferously against taking bailout money, but regulators overruled the request. When the tide went out, we saw that both Wells Fargo and U.S. Bancorp not only had their swimming suits on, but were wearing suits of titanium. The washing out that came with the financial crisis revealed both banks as great companies to invest in for the long term. It also just so happens that both are among Buffetts largest holdings at Berkshire Hathaway -- in fact, Wells Fargo is Berkshires single largest stock holding. While neither stock is as cheap as it was circa 2009, both are still reasonably priced for a long-term owner today.

Click here to continue with Buffetts second best piece of investing wisdom.

Buy Wonderful Companies

Its far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Warren Buffett Interestingly enough, Buffetts mentor, Benjamin Graham, was quite fond of jumping at fair companies trading at wonderful prices. Graham termed this cigar butt investing -- as in, he was looking for discarded cigars that still had a few good puffs left in them. In Buffetts pre-Berkshire days, he ran with this page from Grahams book. To be sure, Berkshire Hathaway itself looked a lot like a cigar butt when Buffett bought it - at the time it was a bedraggled textile business that was markedly unprofitable. Through his career, though, Buffett realized that the real money wasnt in puffing on dirty cigar butts. Instead, the big profits in investing come from finding well-run companies that dominate their industries and hanging onto those companies for a long time. Of course, Buffett isnt one to pay any crazy price for a stock, though, so part of the investment process is determining what a fair price is for the stock and looking for an opportunity to buy the stock at that price. Costco (Nasdaq: COST) is a great example of a company that dominates its industry. Sure, there are other warehouse-shopping clubs out there, but in terms of quality of operations and management, none stack up. And Buffett -- and even more so his right-hand man, Charlie Munger -- are not shy about professing their admiration for the low-price giant. The problem for investors is that its highly unlikely well see shares of Costco trade at true bargain levels unless something dramatically changes the quality and outlook for the company. In a similar vein, Visa (NYSE: V) and MasterCard (NYSE: MA) are among a very small, very dominant group in the growing and highly profitable credit card industry. As the nature of the global payment system continues to move rapidly away from cash and toward cards and electronic payments, both of these payment-network operators stand to rake it in. Just like Costco, though, investors looking for a blue light special on Visa or MasterCard shares will likely find themselves with their hands in their pockets as long as the major growth and success continue. Its not just academic to say that investors who balk at a premium price for these companies missed out. Over the past five years, the S&P 500 is up 35%. Costco is up 93%. As for Visa and MasterCard, theyve tacked on an amazing 162% and 127%, respectively. And investors that bought those companies five years ago werent buying on the cheap. In 2008, Costco fetched an average price-to-earnings multiple of 23.5, while Visa and MasterCard sported respective multiples of 53 and 45. Today, the stocks of all three of these companies still sport higher-than-average earnings multiples. But all three are also still top-notch businesses with stellar growth and profit potential.

Click here to read our final invaluable bit of Buffetts investing wisdom.

The Best Holding Period

When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. -- Warren Buffett What do Procter & Gamble (NYSE: PG), Coca-Cola, and Wal-Mart (NYSE: WMT) have in common? If you said that all three are in Berkshire Hathaways portfolio, youd be correct. If you said all three are up more than 1,000% over the past three decades, youd also be correct. Finally, if you said that at some point during that 30-year span, each of the stocks lost more than 30% of its value in a relatively short period of time well, youd be correct there, too. Although the attraction of fast riches in the stock market can have a strong pull, real investing wealth is built over decades, not months or even years. And if youre curious what real investing wealth means, consider that a $10,000 investment in Wal-Mart 30 years ago would be worth roughly $600,000 today. But there were at least five periods over that stretch when Wal-Marts stock fell more than 20% over the course of a year. An investor with a quick trigger finger and a lack of long-term focus might have been shaken out at any one of those times and missed out on the truly great gains made possible from owning for the whole period. If we look at the stocks in Berkshire Hathaways portfolio today, itd be hard to argue that Coca-Cola is anything but a company worth owning for that forever timeframe. Sure, the stock isnt particularly cheap (see the previous quote if that concerns you), and its faced headwinds lately in the form of a lousy European economy and a lackluster soda market in the U.S. But when you think bigger picture in the form of the companys brand -- it was ranked the No. 1 global brand in 2012 by brand expert Interbrand -- its strong market position in its established markets, and continued growth opportunity in emerging markets, its obvious theres still good reason to own Coke stock for the next year, five years from now, and 20 years from now. When it comes to finding an outstanding business with outstanding managers, Berkshire Hathaway itself would almost certainly need to make the list of companies worth owning for forever. To be sure, Warren Buffett wont always be the CEO of the company, but the way hes built the business has ensured that there are many great managers running its many wholly-owned businesses. And with a highly diversified and high-quality business mix that includes everything from The Pampered Chef and Dairy Queen to GEICO and NetJets, the company has many avenues for growth the casual observer may not appreciate. If thats not enough, consider that theres a team of investors -- not only Warren Buffett, but his hand-selected protgs Todd Combs and Ted Weschler -- that is expertly investing in publicly-traded stocks using all of the wisdom weve just discussed here. Get 10 More Stocks -- Completely FREE!

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All Stock Advisor numbers as of August 13, 2013. All other numbers as of August 16, 2013. Fool contributor Matt Koppenheffer owns shares of JP Morgan Chase, Berkshire Hathaway, and Wal-Mart Stores, but he holds no other position in any company mentioned. The Motley

Fool owns shares of Mastercard Incorporated Common, Costco Wholesale, Berkshire Hathaway, and Wells Fargo.
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