Three insights from Warren Buffett to help you become a better investor

Warren Buffett prefers his investments to have straightforward accounting.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett is regarded by many to be the greatest investor who has ever lived. With more than 75 years of experience in the markets (he bought his first stock aged 11 way back in 1941), he has accumulated a wealth of investing knowledge, which he has shared liberally, both through interviews and his shareholder letters. Here are three pieces of wisdom from the Oracle of Omaha that I think will make all of us better investors. 

Low stock prices are good: Buffett has a famous analogy where he compares buying shares to buying any other product, like cars or hamburgers. As a consumer of goods such as these, you would naturally prefer for their price to be lower, rather than higher, and this is a point easily grasped by anyone. However, low share prices are typically viewed by many as a problem, rather than an opportunity. Buffett seems constantly bemused by this attitude and thinks that as someone who is a net buyer of stocks, low prices are something to be celebrated. The trick is to have the cash available to take advantage when attractively-priced opportunities come around. 

Complicated financial reporting is a sign of trouble: “Beware of companies displaying weak accounting. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen”.

Reading financial reports is not the simplest thing to do, but it shouldn’t be overly complicated either. Generally speaking, a basic knowledge of accounting should be enough to understand 90% of what is written in a trading update. If you find that you are having trouble trying to make sense of paragraphs of small print and appendices, chances are that there is something that management does not want you to see. This is a red flag that should immediately make you suspicious.

Price-to-book does not matter that much: Buffett learned his craft from the father of value investing, Benjamin Graham. He was a highly successful practitioner who made much of his fortune during the 1930s, when valuations were significantly depressed, and he targeted businesses that were trading below what their book value was. In essence, he was able to buy dollar bills for 50 cents. Although he spent his early career following similar strategies, Buffett eventually progressed to looking for “wonderful companies at fair prices” rather than “fair companies at wonderful prices”, meaning that measures like price-to-book became less important to him.

These days, with so much more data available to investors, it is extremely rare to see a quality company trading at or below book value. Indeed, a price-to-book ratio of less than one will often be a sign that there is some structural problem at the business. For these reasons, Buffett prefers to focus on metrics like return on equity and discounted future cash flows, which tell you more about how productive a business is rather than how cheap it is.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »