If you want to invest on your own, billionaire investor Warren Buffett recommends three investing principles that have guided him over the decades.

The principles are derived from a book first published in 1949: “The Intelligent Investor”, written by Buffett’s mentor, Benjamin Graham:

Principle 1: Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.

Buffett has four things he wants to see, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock:

1. “One that we can understand …” When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future. He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them.
2. “With favorable long-term prospects …” Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.” A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.
3. “Operated by honest and competent people …”. “Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something. And it’s just a lot easier to operate with people that are candid. “And we like people who are smart, you know. I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING. The quality of the business itself, however, takes precedence.
4. “Available at a very attractive price.”Buffett’s goal is to buy when the price is below a company’s “intrinsic value.”“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.“And we’re not perfect at estimating that, obviously”, Buffett stated. “But that’s what an investment or a business is all about. You put money in, and you take money out.”

Principle 2: The stock market is there to serve you, not instruct you.

Many non-professional investors become concerned when stock prices fall. They think the market is telling them they made a mistake. Some may even be so shaken that they sell stocks at the lower prices.

Buffett takes the opposite view. If he buys a stock because he thinks the company will be a long-term winner, he doesn’t let the market convince him otherwise.

Principle 3: Maintain a margin of safety

“We try not to do anything difficult …

“This is not like Olympic diving. In Olympic diving, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive.

“That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly.

“So, we look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some Olympic record by jumping over. And it’s very nice, because you get paid just as well for the one-foot bars.” — 1998 BERKSHIRE ANNUAL MEETING

Low cost index funds

Buffett has long recommended that investors put their money in low-cost index funds, which hold every stock in an index, making them automatically diversified. The S&P 500, for example, includes big-name companies like Apple, Coca-Cola and Amazon.

Buffett said that for people looking to build wealth and their retirement savings, diversified index funds make “the most sense practically all of the time.”

“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.”

References:

1. https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2022/03/22/bwp22links.pdf
2. https://www.cnbc.com/2022/05/02/warren-buffett-says-investing-is-a-simple-game.html