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Warren Buffett Financial Tips Cheat Sheet by

Buffett's investment tips for average investor
investing     tip     stocks     buffett

Introd­uction

Warren Buffett is generally considered to be the best long-term investor of all time, so it's no wonder many people like to listen closely to Buffett's words of wisdom, in order to apply them to their own lives. With that in mind, here are seven of the best personal finance lessons learned from Warren Buffett over the years.

1. Forward Thinking

"S­ome­one's sitting in the shade today because someone planted a tree a long time ago"

The lesson here is to be a forward thinker when it comes to personal finance, whether you're talking about investing, saving, or spending. When you're deciding whether to put some more money aside for emerge­ncies, think of a financial emergency actually happening and how much easier your life will be if you have enough money set aside.

Similarly, few people get rich quick by investing, and most people who try end up going broke. The most certain path to wealth (and the one Buffett took) is to build your portfolio one step at a time, and keep your focus on the long run.

Your goal should be to buy invest­ments that you can hold for the long haul. Image source:

2. Buy what you are happy to hold

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years"

In addition to this, one of my all-time favorite Warren Buffett quotes is "our favorite holding period is foreve­r," which is also one of the most misund­erstood things he says. The point isn't that Buffett only invests in stocks he's going to buy and forget about -- after all, Buffett's company Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) sells stocks regularly, and for a variety of reasons. Rather, what Buffett is saying is to invest in stable, establ­ished businesses that have durable compet­itive advant­ages. That is, approach your invest­ments with the long term in mind, but keep an eye on them to make sure your original reasons for buying still apply.

3. Price vs Value

"Price is what you pay; value is what you get"

When you're buying an investment (or anything else for that matter), the price you pay and the value you receive are often two very different things. In other words, you should buy a stock if you believe its share price is less than the intrinsic value of the business -- not simply because you think the price is low.
For example, if a market correction hit tomorrow and a certain stock were to fall by 10% along with the overall market, would the business inherently be worth 10% less than it is today? Probably not. Similarly, if a stock rose rapidly, it wouldn't necess­arily mean that the value of the underlying business had risen as well. Be sure you consider value and price separately when making investing decisions.
 

4. Cash is Oxygen for a Business

"Cash ... is to a business as oxygen is to an indivi­dual: never thought about when it is present, the only thing in mind when it is absent­"

One of the reasons Berkshire Hathaway not only survives recessions and crashes, but tends to emerge even better than it went in, is that Warren Buffett unders­tands the value of keeping an "­eme­rgency fund." In fact, when the market crashed in 2008, Berkshire had enough cash on hand to make lucrative invest­ments, such as its purchase of Goldman Sachs warrants.

Berkshire Hathaway's rainy-day fund is probably a bit bigger than yours; Buffett insists on keeping a minimum of $20 billion in cash at all times, and the current total is around $85 billion. However, the same applies to your own financial health. If you have a decent stockpile of cash on the sidelines, you'll be much better equipped to deal with whatever financial challenges and opport­unities life throws at you.

5. Risk comes fron Lack of Knowledge

"Risk comes from not knowing what you're doing"

One of the best invest­ments you can make is in yourself and the knowledge you have. This is why Buffett spends hours of every day reading, and has done so for most of his life. The better educated you are on a topic, whether it's investing or anything else, the better equipped you'll be to make wise decisions and avoid unnece­ssary risks. As Buffett's partner Charlie Munger has advised: "Go to bed smarter than when you woke up."
Unless you have the time and desire to do hours of investment research, you're better off avoiding individual stocks

6. Most people should avoid individual stocks

Most people should avoid individual stocks

Buffett has said on several occasions that the best investment for most people is a basic, low-cost S&P 500 index fund, like the one he is using in a bet to outperform a basket of hedge funds . The idea is that investing in the S&P 500 is simply a bet on American business as a whole, which is almost certain to be a winner over time.

To be clear, Buffett isn't against buying individual stocks if you have the time, knowledge, and desire to do it right. He's said that if you have 6-8 hours per week to dedicate to investing, individual stocks can be a smart idea. If not, you should probably stick with low-cost index funds.

7. Remember to give back

Warren Buffett is a co-founder of and partic­ipant in The Giving Pledge, which encourages billio­naires to give their fortunes away. Buffett plans to give virtually all of his money to charity, and since he signed the pledge, he has given away billions of dollars' worth of his Berkshire shares to benefit various charitable organi­zat­ions.

Buffett once said, "If you're in the luckiest one percent of humanity, you owe it to the rest of humanity to think about the other 99 percen­t." And even if you're not a member of the 1%, it's still important to find ways to give back.

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