5 investment lessons from the richest man in the world

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Warren Buffett is one of the richest men in the world, thought to be worth $37 billion. If you trusted him with $10,000 when he started out, you would have a cool $50 million now. He is an American investor, businessman, and philanthropist.

Warren Buffet is one of the most successful investors in the world, the primary shareholder and CEO of Berkshire Hathaway.

Fascinating BBC Warren Buffett Documentary

Warren Buffett despite his billions lives modestly in his native Omaha, in America’s mid-West, and runs his $150 billion business with a staff of just 20. BBC Evan Davis met him to find out about his unique investment strategy and his eccentric lifestyle.

He talks to Warren Buffett’s family, friends and colleagues about the man they call the Sage of Omaha, and Buffett’s friend Bill Gates praises his philosophy of life. As the greed of the super-wealthy is widely criticised in the current financial crisis, Davis asks whether Warren Buffett is the acceptable face of the filthy rich.

Here are 5 tips he gives to investors:

  1. “Look at stocks as parts of business. Ask yourself, ‘How would I feel if the Stock Exchange was closing tomorrow for the next three years?’ If I am happy owning the stock under that circumstance, I am happy with the business. That frame of mind is important to investing.”
  2. “The market is there to serve you and not to instruct you. It is not telling you whether you are right or wrong. The business results will determine that.”
  3. “You can’t precisely know what a stock is worth, so leave yourself a margin of safety. Only go into things where you could be wrong to some extent and come out OK.”
  4. “Borrowed money is the most common way that smart guys go broke.”
  5. “The stock doesn’t know you own it. You have feelings about it, but it has no feelings about you. The stock doesn’t know what you paid. People shouldn’t get emotionally involved with their stocks.”
Warren Buffett interview on how to read stocks

Offers some great tips on how to value stocks,

Every year Warren Buffett shares his financial wisdom and here are five lessons from him:

1. Fear is your friend.

The past two years were an “ideal period” for value-minded investors. For example, Buffett managed to scoop up bargains ranging from municipal bonds to securities of Goldman Sachs, GE, and others. “When it’s raining gold,” he writes, “reach for a bucket, not a thimble.”

2. Focus on the (really) long term.

Buffett notes the investments that he and partner Charlie Munger prefer are “businesses whose profit picture for decades to come seems reasonably predictable.” Not the next two months or quarters or years, mind you. Decades.

3. Stick with what you know.

Against the advice of the firm’s managers, Buffett pushed Geico, the home and auto insurer that Berkshire owns, into the crowded credit card business several years ago. Geico bailed out in 2009, losing about $50 million in all. The moral: If you don’t understand that commodity ETF your pal is bragging about, pass on it.

4. Maintain a cushion.

While firms were fighting for their lives in the credit crisis, Berkshire kept doing deals. Why? Because Buffett keeps about $20 billion in cash on hand. This reserve is earning “a pittance,” he says. “But we sleep well.” A reserve will help you sleep better too, especially as you near retirement.

5. The buck stops with you.

Buffett oversees virtually all derivatives contracts on the company’s books. “If Berkshire ever gets in trouble, it will be my fault.” You need to adopt the same attitude. Whether you go it alone or work with an adviser, understand the level of risk you’re assuming. If something goes wrong, you’ll suffer the consequences.