Personal Finance

4 New Pieces of Wisdom From Warren Buffett

Warren Buffet walking among investors.

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) just released its annual letter to shareholders , penned by legendary investor Warren Buffett. In typical Buffett fashion, sandwiched between the business metrics and financial data are pearls of investing wisdom. While these usually address a specific occurrence or happening that year, they almost always contain valuable lessons that can be applied to a broad array of investing circumstances.

Here are a few that were shared in this year's missive.

Warren Buffet walking among investors.

Warren Buffett's pearls of wisdom are legendary among investors. Image source: The Motley Fool.

We did well -- but not THAT well

In the opening paragraph of shareholder letter, Buffett pointed out that Berkshire Hathaway had a standout year, increasing its per-share book value by 23%. In the very next paragraph, though, he took the opportunity to prevent any misconception. "2017 was far from standard," he said. "A large portion of our gain did not come from anything we accomplished at Berkshire."

He was of course referring to recently enacted U.S. tax legislation , which lowered the top corporate tax rate from 35% to 21%. Buffett said that while the entire $65 billion gain was real, only $36 billion was the result of Berkshire's operations.

Investors can apply this simple observation to the vast majority of companies whose results were affected by changes to the tax law -- particularly when assessing year-over-year performance.

Pesky new accounting rules

Buffett is not a fan of a recent accounting pronouncement that requires unrealized investment gains and losses from stock investments to be included in net income.

He said, "That requirement will produce some truly wild and capricious swings in our GAAP bottom line." He went on the point out that Berkshire holds $170 billion in marketable securities and feels that this could easily cause swings of $10 billion in any given quarterly reporting period. Buffett further said, "We have regularly warned you not to pay attention to these realized gains, because they -- just like our unrealized gains -- fluctuate randomly."

Buffett went on make an observation that investors should take to heart: "Consequently, media reports sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers."

This illustrates an important lesson to go beyond the headlines to understand what is happening with a company, and refrain from making buy and sell decisions based on fear-inducing headlines.

Not fond of trading -- or talking heads

Another longtime belief of the Oracle of Omaha is that investors should adopt a mindset as owners of a business, not those of stock traders. He also recommended weighing the views presented in the financial media.

Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their

Wise investors would do well to heed his advice and not buy or sell a company based solely on how well it performs compared to analysts' expectations.

Neither a borrower nor a lender be

It was the first part of this quote from William Shakespeare's play Hamlet that Buffett alluded to -- namely not borrowing money in order to own stocks. He focused on short-term stock movements, using Berkshire Hathaway's largest drops as an illustration. He strongly advocated against using debt to finance a portfolio.

This ... offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.

This advice can also be applied to any large-scale correction that might result in fear-induced trading.

A time-honored tradition

There is much investors can learn from the Oracle of Omaha. Berkshire's annual shareholder letter has produced its share of gems over the years, and investors willing to learn can find much wisdom in those pages.

10 stocks we like better than Berkshire Hathaway (B shares)

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Berkshire Hathaway (B shares) wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

Danny Vena has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More