The Wisdom of Warren

Money Report

10 lessons from legendary investor Warren Buffett to help you build your retirement portfolio—and keep it growing for the long term.

By Dan Caplinger
Photos by Sam Smith

WARREN BUFFETT is one of the most successful stock market investors of all time. Along the way, he has shared much of his wisdom with the world, and millions of investors have reaped the benefits. We have gathered 10 key Buffett investment lessons to live by.

Hold plenty of cash for emergencies—and for opportunities.
If you’ve ever gotten into an unexpected financial jam, you know how useful a rainy-day fund can be. And making the transition from a career to retirement requires a big adjustment: Your cash needs evolve as you grow older. Rather than relying on a regular paycheck, retirees have to count on Social Security and whatever cash their nest egg generates. Set up a larger emergency fund so you can better weather any financial tempests. And, as Buffett has, tap the fund as needed to take advantage of lucrative investment opportunities—when most other investors cannot.
Be patient with your cash and you’ll always be in a position to take action and invest at the best possible time.
Embrace the boring.
Boring companies don’t make for interesting cocktail party stories. But what Buffett and other successful investors have found is that companies in less exciting industries often produce excellent long-term returns, which is the principal goal for retirement investors. For example, the business of diapers, soap and toilet paper might not seem to have as much potential for growth as making the next big high-tech gadget, but one Buffett holding, Procter & Gamble, has become a global consumer-products leader. Investors who put $1,000 into P&G stock in 1986 and reinvested their dividends would have more than $32,000 today.
By being the best in their business, boring companies often provide better rewards to their shareholders than do high-flying upstarts.
Look for companies with top brands and the ability to control prices.
Creating brand loyalty is one of the most effective ways for companies to build success, earning them both repeat business and word-of-mouth recommendations that bring in new customers. Loyal patrons will pay more for a brand-name product. That is what gives strong brands better profit margins.
Coca-Cola is a prime example of a Buffett holding with a strong brand. The soft drink giant’s trademark red cans, stylized cursive logo and marketing slogans are known around the world, and the value of Coca-Cola’s identity made it the third most valuable global brand in 2015, according to Interbrand. Going well beyond its original carbonated cola, Coca-Cola has used its brand strength to broaden its reach into areas such as juice and bottled water. That reach equals shareholder value, because Coca-Cola consistently charges more than store-brand offerings, yet retains a loyal customer base.
Investing in strong brands can give you outsize returns.
A great manager is as important as a great business.
Buffett has said that great businesses must be able to survive bad managers, because eventually they’ll have to. When a company has a good manager, however, it can boost its long-term prospects considerably. A great leader may not only foster a strategic vision but also help a company achieve it.
Buffett is a good example in his role as the head of Berkshire Hathaway. It’s easy to come up with others, such as Bill Gates in his tenure at Microsoft, the late Steve Jobs at Apple and Jeff Bezos at Amazon.
When you combine a great manager with a strong business model, you will often see exemplary long-term returns.
Minimize your mistakes, and learn from the ones you make.
No one likes to err, but even Buffett makes mistakes. One recent example was his investment in Tesco, a leading food retailer in the U.K. In 2013, Buffett had soured on the company’s management and sold some shares at a profit. But when accounting problems surfaced and the company’s market share fell, he cashed out with a loss of almost $450 million. The key to overcoming errors in your investing is to see exactly where you went wrong. In some cases, unforeseeable circumstances will cause you to lose money. But more often, you’ll discover warning signs you didn’t notice at first. Knowing those signs can save you from repeating that mistake and suffering even larger future losses.
Keep a record of your investing mistakes and you’ll have a guide to make you a better investor. Share those lessons with children and grandchildren to help them build their own fortunes.
Stick with what you know.
The sheer size of the stock market intimidates many would-be investors. Yet Buffett has learned that you can be successful without becoming an expert in every part of the market. In the late 1990s, he refused to embrace the technology revolution, and he avoided buying shares of tech stocks during their huge bull market run. As a result, he largely avoided the worst of the tech bust that followed, from 2000 to 2002.
If there are certain areas of the financial markets that you’re more familiar with, it pays to focus your efforts on them and take advantage of any special insight you have.
Avoid whatever won’t increase your purchasing power over time.
Buffett favors investments that produce consistent income as well as steady growth over time. In 2011, Buffett used gold as an example of a non-income-producing asset, noting that the entire global gold supply could be melted into a 68-foot cube. At that time, gold had the same market value as the entire 400 million acres of cropland in the U.S., plus 16 Exxon Mobils. Buffett pointed out that the cropland produced $200 billion in crops every year, and Exxon Mobil had profits of more than $40 billion, making them more valuable than gold. Many investments ofer both growth and income opportunities. Even if you don’t need the income right now, dividends speak to the inherent success of the company’s business.
Retirees in particular benefit from income-producing investments that can keep up with (or even beat!) inflation and sustain investors’ purchasing power throughout their lives.
Never overpay.
No matter how successful a company is, a share price that’s too expensive makes the stock a bad investment. At stratospheric prices, anything short of the best-case scenario for a company can leave long-term investors with losses.
That’s why you’ll often see Buffett wait until an industry’s prospects dim before investing. For instance, he has recently purchased shares in energy companies, to try to capitalize on companies whose stocks plunged following the decline in oil and natural gas prices.
By making a watch list of interesting stocks and waiting for their valuations to fall to more sustainable levels, you will increase your returns potential. With age comes patience. That can be an advantage when you are investing.
Buy and hold.
It’s easier to make an excellent decision once than to do it over and over again. Frequent traders often fall into the trap of having to make multiple decisions correctly. One misstep can make traders lose their profits on a stock position. If you’re right about when you first buy a stock but wrong about the subsequent sale, you’ll lose money or leave profits on the table. If you sell early and then fail to buy back in at the right time, you’ll potentially miss out on big gains.
The buy-and-hold, long-term investor makes just one key decision: which stocks to buy. Once that decision is made, the only thing long-term investors need is the discipline to keep the stock. That doesn’t mean you’ll hold every stock forever. But it does mean you minimize the number of smart decisions you have to make, and that improves your overall odds of success in the long run.
The more opportunities you give yourself to make a mistake, the more likely it is you’ll eventually make one.
Don’t shy away from revolutionary investments.
Investors think primarily about profits, but the business world is full of visionaries looking to improve the world in some important way. And there is often a payoff in such a forward-thinking and philanthropic investment philosophy, even for retirees, because once customers realize the practical value of an innovative product, they won’t accept anything less.
For instance, in making Berkshire Hathaway’s investment in General Electric in 2008, Buffett lauded GE as “the symbol of American business to the world” and said that given its strong leadership and brand presence, he was “confident that GE will continue to be successful.”
The industrial giant’s new leadership role in the wind energy and turbine business has made it a pioneer in the renewable-energy industry, and advances in aerospace engine technology and medical imaging devices have also touched millions of lives. The result has been life-changing products for people across the globe—while Buffett has reaped substantial gains from his investment in the conglomerate.
The spirit of innovation can produce strong investment returns under the right circumstances.

Dan Caplinger is a financial planner and regular contributor to the Motley Fool, a website offering financial news and analysis for personal investors.