"I can say the dumbest things in the world and a fair number of people will think there's some great hidden meaning to it or something."
— Warren Buffett, the oft-quoted CEO of Berkshire Hathaway and unofficial holder of the "world's greatest investor" title.
There's a big risk in listening to someone give advice outside his circle of competence. Listen to a Hollywood actor speak for five minutes if you want proof.
Keeping this warning in mind, we've assembled Warren Buffett's top 10 nuggets focusing solely on his area of unquestioned expertise — investing.
10. "A ham sandwich could run Coca-Cola."
Believe it or not, that's a compliment to Coke. It speaks to why it's been Berkshire Hathaway's biggest holding.
As Peter Lynch put it, "Go for a business that any idiot can run — because sooner or later, any idiot probably is going to run it."
9. Margin of safety
As with many of his most beloved tenets, Buffett got this one from his mentor, Benjamin Graham. A margin of safety simply means buying in at a price well below your best estimate of a company's intrinsic value.
In other words, don't just buy names like Coca Cola, Seek (ASX: SEK) and Wotif.com (ASX: WTF) because they are great companies with strong moats (more about moats later).
Go the extra step, and only buy them when they are great companies selling for good to great prices.
8. The concept of inner scorecard vs. outer scorecard
"If the world couldn't see your results, would you rather be thought of as the world's greatest investor but in reality have the world's worst record? Or be thought of as the world's worst investor when you were actually the best?"
Those who answer the latter have an inner scorecard. They'll have the ability to be a true contrarian, ignoring the world's judgment and focusing on long-term results.
7. Don't fall into the false precision trap
"We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas."
It's important to keep the big picture in mind. A 20-tab Excel model that calculates a company's value on a discounted cash flow basis is useless unless you understand the business enough to feed in good assumptions.
When Buffett made a killing on PetroChina, the mispricing was so obvious that his only due diligence was reading its annual report. Not recommended for mere mortals, but you see his point.
6. A share is the right to own a little piece of a business
Another Graham idea. We frequently divorce a share price from its underlying company, especially when Mr. Market is delivering up a volatile stock price.
Remember, though, that in the long run, a share is only as good as the company backing it up. Kind of like how a promise is only as good as the person making it.
5. "Intensity is the price of excellence"
When asked what the most important key to his success was, Buffett answered "Focus." Microsoft founder Bill Gates answered the same way.
Buffett reached his current heights not only because of his brilliant mind, but also because of a focus that has had him analysing shares for hours on end, just about every day, for decades.
The takeaway for armchair investors is to stick to buying and holding index tracking funds and ETFs, unless you have the time to dedicate to individual shares picking. Even then, indexing should be the core of most portfolios.
4. Use greed and fear to your advantage
One of Buffett's most famous quotes is "Be fearful when others are greedy. Be greedy when others are fearful."
Remembering the concept of an inner scorecard, and the Rudyard Kipling admonition to "keep your head when all about you are losing theirs," can lead to outsize returns as Mr. Market sways back and forth.
3. "Leverage is the only way a smart guy can go broke."
Debt is dangerous. That's why you can have banks rife with Harvard MBAs that are always a few days away from bankruptcy via a crisis in confidence. See also: Lehman Brothers, Enron and Long-Term Capital Management.
For regular investors, buying stock using margin replicates this risk. Don't do it.
2. The concept of a "moat"
Buffett looks for companies with moats, or sustainable competitive advantages. The strength of Coca-Cola's moat (its brand) is why he believes a ham sandwich could run it. The stronger a company's moat, the more likely it will be a leader for decades rather than years.
For examples, see some of the other companies Berkshire Hathaway owns a significant stake in: American Express, Johnson & Johnson, and Procter & Gamble.
Of course, don't forget a strong moat doesn't mean a particular company is a great investment all the time, but it certainly helps!
1. The Snowball
Buffett's definitive biography, The Snowball, is titled so because it sums up his life in two words. Over everything else, Buffett believes in the power of patiently compounding over time.
In investing, that means starting as early as possible (he started as a pre-teen), avoiding short-term risks even if it means lower possible returns (rule No. 1: never lose money), and letting investing returns build upon itself.
By heeding these 10 lessons from Buffett, we can all turn our snowballs into snow forts.
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