Warren Buffett’s Top 20 Tips That Will Save You From Financial Disaster
Warren Buffett is one of the most widely trusted investors of the modern era. When he offers financial advice, it’s worth listening to — especially if it can help you avoid financial disaster.
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Start an Emergency Fund
Buffett says you should start an emergency fund before investing. Try to fund it with three to six months’ worth of expenses. That way, if you suddenly lose your job or have to allocate your paycheck elsewhere, you won’t have to sell your assets to get back on track.
You can’t time financial emergencies — if they occur when the market is down, you could be forced to sell for a loss unless you have enough in savings to cover the cost.
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Avoid Debt
Buffett is strongly against debt. In a 2004 Berkshire Hathaway meeting, he said, “It’s very tempting to spend more than you earn. It’s very understandable. But it’s not a good idea.” This puts him in line with other personal financial experts, like Dave Ramsey, on the subject.
When you’re in debt, unexpected expenses can be devastating. They can force you to miss installment payments, which may hurt your credit score and delay you from reaching your financial goals.
Pay Yourself First
Next, Buffett recommends making saving your first priority. He said, “Don’t save what’s left after spending, but spend what is left after saving.”
You can summarize his mindset as paying yourself before you pay others. This shift in approach can improve your spending habits and make sure you’re always primarily focused on building wealth.
Think Long Term
When it comes to investing, Buffett prides himself on taking the longest view in the room. In a 2022 shareholder letter, he said, “Our favorite holding period is forever,” and “having a long attention span and the ability to concentrate on one thing for a long time is a huge advantage.”
For the average person, this is a reminder to only invest in companies and assets you’re comfortable holding for many years. When you adopt this strategy, you’re less likely to make financial decisions based on short-term market fluctuations. This ensures you benefit from the long-term growth of great companies instead of selling too soon and missing out on gains.
Recognize What You Don’t Know
One reason people struggle with investments is they buy stocks they don’t really understand. When you don’t understand an asset, it’s harder to make good decisions about when to buy, sell and hold it.
Buffett is a firm believe in never investing in what you don’t understand.
Create Opportunities for Yourself
Buffett was a big believer in side hustles before the term existed. In his early years, he made extra money by delivering newspapers, selling used golf balls and even buffing cars.
Stories from Buffett’s early years show that he was always looking for new opportunities for himself. When they didn’t exist, he created them. Adopting a similar approach could help you bring in more income, which means more cushion for scary financial situations.
Be OK With Sitting Out
Buffett’s company, Berkshire Hathaway, has $168 billion in cash and short-term investments. If you had that much extra cash lying around, you’d probably invest a good chunk of it. But Buffett doesn’t. He’s OK with waiting on the sidelines until the right opportunity emerges.
His famous “20-slot rule” is a great example of the philosophy. He says to imagine you had a card with only 20 slots in it — those slots represent all of the investments you could make in your lifetime. You’d probably think a little more carefully about the assets you buy and sell. This is how Buffett always thinks.
Admit Your Mistakes
Though Buffett has built an empire, he’s the first to say that he’s made plenty of mistakes along the way. The difference between him and the average investor is that he admits to his mistakes and takes corrective action quickly. You can benefit from doing the same in your financial life.
Don’t Buy the Hype
Buffett is famously resistant to market trends. He said, “The key to investing is not assessing how much an industry is going to affect society… but rather determining the competitive advantage of [a] given company…”
He wrote that statement near the peak of the tech bubble in 1999. It’s a great reminder that the shiny new thing isn’t always the best place for your money.
Buffett has missed plenty of opportunities by failing to invest in emerging technology. He passed on Tesla when it was only valued at $200 million and missed the earliest days of Amazon and Google, as well. Despite those misses, Buffett has amassed one of the largest fortunes on the planet. It shows that you don’t have to invest in the latest trend to make it big.
Give Yourself a Margin of Safety When Investing
If you’re going to invest your money in a company, Buffett advises giving yourself a margin of safety on the evaluation. He calls this one of his cornerstones of investing.
Buffett starts his process by assessing the fair value of a company. Then, he discounts that fair value by as much as 50% and sets this figure as his price target for purchasing the stock. If you can do the same, you’ll rarely make a poor investment.
Diversify, but Not Too Much
Buffett’s holdings show he believes in some diversification when investing, but he warns against wide diversification, saying it’s “only required when investors do not understand what they are doing.”
The lesson is that diversification just for diversification’s sake isn’t always a smart move. If you truly understand a company and believe in it, it’s OK — and perhaps even smart — to invest in it heavily.
Focus on Temperament, Not Intellect
Buffett believes that an investor’s temperament is more important than their raw intellect. He said, “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
For an example, consider the Great Recession from December 2007 to June 2009. Stock indices collapsed as worries about bank failures spread like wildfire.
Some people panicked and pulled their money out of the market after the damage had already been done. Many of these investors ended up buying back later and missing out on much of the recovery. The only reason for their missed gains was their fear.
Even the smartest of those who panicked were likely outperformed by people like Buffett, who continued investing despite the economic woes. This shows you don’t need to be a genius to get rich.
Pick Businesses, Not Stocks
Stocks are so easy to buy nowadays that it’s easy to forget they represent shares in real businesses. Buffett warns against falling into this trap when making your investment decisions. In his 2022 shareholder letter, he said, “Charlie Munger and I are not stock-pickers; we are business-pickers.”
The lesson here is to think like a business owner, not someone who is trying to turn a profit on an asset. You want to invest in companies with competitive advantages that they can maintain long term — not stocks you think will go up soon.
Learn Fundamental Accounting Principles Before Investing
When Buffett looks at a company he’s interested in buying, he starts by considering its financials. To do that effectively, you need to understand basic accounting principles, as these tell you how to value the company accurately.
Here’s why this is so important, according to Buffett: “When management takes the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom one cockroach in the kitchen.”
There are many different ways to value a business, from book values to discounted cash flows and market capitalization. The more of these methods you use, the more confidence you can have in your valuations. This can help you make smarter investing decisions so that you lose less capital in the market.
Pounce When Opportunity Arrives
Buffett doesn’t invest in a new opportunity easily. But when the conditions are right, he advises investing heavily instead of waiting for a stock with a depressed value to bounce back. His famous quote on the subject reads, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
This statement explains why Buffett keeps so much cash on Berkshire Hathaway’s books. He wants to be ready to invest heavily when market conditions shift and great opportunities arise. You can follow this strategy, too, by trying to keep funds on-hand for that opportunity, so you don’t miss out when it does come along.
Retire With a Purpose
Despite his age, Buffett has shown no signs of wanting to retire anytime soon. He believes that people who retire without a clear purpose experience more health issues and a lower quality of life.
Instead of thinking about retirement as a winding down, Buffett says to consider it the next phase of life. Doing so will help you enjoy your golden years. The approach may also make it easier to avoid financial mistakes, as people sometimes spend money in response to boredom and other negative emotions.
Stay the Course
Even when times are tough, Buffett says it’s important to stay the course. He was famously unfazed in 2011 when the S&P downgraded its credit rating on U.S. debt.
Instead of getting cautious like many investors of that era, Buffett made cash offers to acquire several new businesses. He did so because he believes temporary market fluctuations have no bearing on the long-term fair values of great businesses.
For the average investor, this means you should continue investing, even when the market is down. Doing so will allow you to benefit like Buffett when the good times return.
Start Early
Buffett’s investment philosophy focuses on taking advantage of the effects of time. Over decades, you can turn a small amount of money into millions — as long as you stay invested in high-performing companies.
However, to become truly wealthy, Buffett says you need to start early or live until you’re very old. This gives you more time in the market, which has historically only gone up if you zoom out and take the long view.
Pay Attention to Fees
Buffett recommends a 90/10 investing strategy to most people — putting 90% into stock index funds and 10% of your capital into low-risk government bonds.
However, not just any index fund will do. Buffett said, “Costs really matter in investments. If returns are going to be 7% or 8% and you’re paying 1% for fees, that makes an enormous difference in how much money you’re going to have in retirement.”
Don’t Lose Money
Buffett’s most famous money tip is an obvious one with some wisdom under the surface: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
Of course, no one makes an investment intending to lose money. But most people don’t base their investment decisions around this rule.
For example, you might buy a stock that you like just because you think it’ll go up in value soon. Buffett probably wouldn’t do that. Even if he liked a stock, he’d refer back to rule one before buying — don’t lose money. This would lead him to wait to buy the stock until it’s priced at a point where losing a significant amount of money is extremely unlikely.
Final Take
Buffett may be the most famous financial mind of his generation. However, his investment philosophy is relatively simple. Buffett built his fortune by being more patient than the average investor, focusing on businesses he understands and investing heavily when the conditions are right.
The combination of a smart investing strategy and a backup fund in case of emergency could help you follow in his footsteps — and, if financial disaster does strike, you’ll have a buffer to protect yourself.
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This article originally appeared on GOBankingRates.com: Warren Buffett’s Top 20 Tips That Will Save You From Financial Disaster
