Defining Intelligent Investing According to Warren Buffett

First, let me say that you need to go out and buy The Essays of Warren Buffett as soon as you can.  In this short 7-page section he does an amazing job at explaining what it means partake in Intelligent Investing vs. what we all have likely done before- pretending that we are day traders.

Buffett really talks about the importance of buying and selling and if you are a sports fan at all, this example is all you need to help you understand.  As an investor, you want to look for a stock before if comes to full maturity. 

You want to get it when it’s undervalued and then ride it out up until the point where it becomes overvalued and then you can cut ties.  You don’t simply buy the stock and then sell it a week later because it went up 10%.  10% isn’t your goal.  Tenbaggers are your goal.

Pretend you’re the Chicago Bulls and you drafted Michael Jordan.  Michael Jordan was drafted third in his class but he’s debatably the best player of all time (I vote Lebron lol) so I would say he was undervalued.  The Bulls didn’t get a couple good years and then cut the cord – they rode that thing out!  And your investments shouldn’t be any different.

Buffett also talks about how they prefer business that aren’t likely to experience major changes because if they can find a business today that has a competitive advantage, it will likely still hold that same advantage in 5, 10, 20 years! 

On the contrary, that is the exact reason why Buffett and Munger do NOT invest in tech companies.  They don’t own tech companies because they don’t know what sort of competitive advantage is actually sustainable in today’s landscape so it makes it hard for them to find a company to invest in for the long-term because things are constantly changing, so finding a company that you know will still be a tech giant in 20 years is going to be hard to do.

I mean, even Jeff Bezos thinks that Amazon will fail at some point in his lifetime, stating that most companies range around 30+ years, not 100+, per Business Insider.

This doesn’t mean that Buffett and Munger discourage technical advances by any means – and quite the opposite to be frank.  Buffett says that view it the same way as the constant desire to get people to the moon “We applaud the endeavor but prefer to skip the ride.” 

Now, that might be a little bit of a hyperbole, but I love that sort of comparison as that is what is going to stick with you.

Buffett goes on to talk about the importance of investing in sound management but that it’s not as fool proof as it used to be.  You used to be able to find a strong management group and simply let them run with it and trust them to not steer you down the wrong path. 

Nowadays, so many companies are focused on M&A and expanding their business that they tend to lose focus on what made them successful in the first place.

Management losing focus on their core business is the biggest fear for Buffett and Munger.  They still vividly remember the days where Coke used to grow shrimp…do you remember those days?  Honestly, I felt sick just reading that…

As a new investor, you need to focus on what you know.  You should invest in the things that you know and if you don’t think any of the companies that you know are good investments, then increase what you know before you decide to step out and invest in something new.  The size of your circle of “know” isn’t important – knowing the boundaries of what you do and do not know, is important.

Buffett said that if you want to be a successful, average investor, you need to focus on two things:

  1. Find out how to value a business
  2. Understand how to think about market prices

That’s it!  If you can do those two things, you’re going to be much better off than the typical investor.  Buffett thinks that the average investor is better off investing only in index funds, and I agree with him. 

I like to think that I am writing for those that want to be above-average, however, so we will continue to zig when Buffett wants people to zig ?

One of my favorite quotes of Buffett is “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”  I truly think that there are very few quotes that are more important to a long-term investor than this is.  We’re not day traders.  We’re investors.  You don’t invest in something for a day, a week, a month – or maybe less than all of those!

When you buy a stock, you are becoming a part owner.  You should understand the company and only get involved because you trust in the management, past and future of the company that you just invested in.  If you don’t feel that way, then don’t even think about buying any shares.

In summary, Buffett really does have a few super simple tips for all of us when it comes to investing that absolutely anyone can follow if they want to be successful:

  • When you invest, you’re an owner of a company – you’re not a day trader
  • Focus on companies that have long-term competitive advantages
  • Invest in what you know
  • Focus on the management of the company (and make sure they focus on their core business)
  • Understand how business are valued and how market pricing works

If you can truly understand and key in on these five things, you’re going to succeed as an intelligent investor in your life.  If you decided to push your luck and step outside of these boundaries, you might get lucky a time or two, but eventually things will catch up to you and you will fail. 

But why wouldn’t you just follow these tips from Buffett?  I mean, he’s only the greatest value-investor of all time…

Learn the art of investing in 30 minutes

Join over 45k+ readers and instantly download the free ebook: 7 Steps to Understanding the Stock Market.

WordPress management provided by