Buffett's 5 Investing Rules

As most of you know, we are Warren Buffett disciples. CNBC had a short video listing Buffett's shortlist of investing rules. We have written extensively about these rules in past client memos, but we thought a refresher was in order:

  1. Don't buy or sell based on current headlines. Many investors make decisions based on the most recent past or near future. We plan to hold our investments for 5-10 years, so we're more interested in how the business looks in 5 years, compared to extrapolating the recent past. In fact, short-term problems generally present an entry point.
  2. Don't try to profit from bubbles, just avoid them. Investors get enamored with what has worked recently. An asset increases in value and pretty soon it's a self-fulfilling prophecy. Investors forget about the underlying asset, what is produces, and its intrinsic value. Example today: fixed income
  3. Eliminate/mitigate emotional behavior when investing. The Dow went from 11 at the turn of the 20th century to 11,000 at the end of the century, an incredible 10-11% annual return (including dividends). However, many investors had a negative experience investing in the stock market because investment decisions were emotional. Don't try to "time the market." Peter Lynch once said, "More money has been lost in market timing than all the corrections combined."
  4. Always buy productive (cash generating) assets. Assets that produce steady cash flow are favored and will outperform non-cash-generating assets.
  5. Don't bet against America. The country will and does have issues (Civil War, Great Depression, WWI & II, 9/11, Financial Crisis, current political madness), but our system works and has overcome every past obstacle.