Warren Buffett’s Essential Advice for Stock Investors (3 Key Principles)

In 1995, Warren Buffett shared his 3 most important investing principles during the Q&A session of Berkshire Hathaway’s annual meeting. In this clip, Warren Buffett was asked about how he estimates the intrinsic value of stocks and how that compares to the intrinsic value calculated by his mentor, Benjamin Graham.

In classic Buffett fashion, he provides clear and timeless advice to investors that we can still use and apply today.

Note that Buffett and Benjamin Graham, had developed distinct styles of value investing that affected how they valued stocks. Buffett places little to no consideration on book value of a company when evaluating whether or not to invest. Graham on the other hand focused almost exclusively on using a variation of book value to evaluate stocks, called “net-net” value. Both men found tremendous success in their lifetimes. Buffett acknowledges that there can be differences in the exact valuation technique, but the following three key principles should be applicable to every investor seeking long term investment success.

Warren Buffett's FIRST key principle is your attitude towards the stock market. This is covered in detail in chapter 8 of the Intelligent Investor. It should be clear to investors that you must be comfortable with the fact that the market will swing over the course of time. Swings may be as high as 50% increases from an stock’s lowest price and 33% decreases of the stock’s highest price at various points over the next five years. Those stock quotations are there to be taken advantage of by investors, not the other way around.

Below is one paragraph from that chapter which was highlighted by the editor as likely one of the most important passages in the entire book:

The true investor is scarcely ever forced to sell his shares, and all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment.
– Benjamin Graham, Chapter 8 of The Intelligent Investor

Warren Buffett's SECOND key principle is to invest with a margin of safety. This introduces the concept of intrinsic value. Intrinsic value refers to the value of a company or stock determined through fundamental analysis without reference to its market price. Understand that a stock’s price and a stock’s value are two different things, and that they don’t always align. Investing with a margin of safety means buying a stock only when it is trading below your estimate of its true intrinsic value. The larger the margin of safety, the lower the risk and higher potential for future returns.

Warren Buffett's THIRD key principle is to look at stocks as businesses. This is a long term perspective that is less focused on short term stock prices and more on long term business prospects and performance. Buffett constantly will ask questions on a company’s business risk. Is the company capitalized in a way that puts the company at risk to creditors? Is the management team strong and aligned with shareholder interests? Does the company have a lasting competitive advantage or economic moat that protects it from competition? You will do better as an investor and think more about a business before investing in it or selling it off.

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DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. Investing of any kind involves risk and your investments may lose value.

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Michael Jay - Value Investing

[tamershahin]

So much to learn by just listening to those guys...
great commentary
Keep it up Michael

[kingofwebguru]

Great video! One of the best videos on investing. Mike, do you know any good resources on how to calculate an intrinsic value for beginners?

[adrienlim]

Hey Michael, what do you think of GME new CEO? Possible turn around story?

[jpcastroi]

What a great content! Brazilian fan here

[danielkariti]

Great video
Do you still buy the dip on NWL?
Also what do you think about CVS/UNH Stocks especially with the dips

[Saoyaron]

great video! keep it up! can you make one on how to assess intrinsic value?

[DaMviestar]

Thanks for an Awesome video . Having this repeated is always a good thing.

[dnaigo]

This is a gold video. Thanks mike for your wonderful sharing

[hapowoverhere]

This is actually a pretty damn good video. Thank you

[sanoski]

Some great information coming from one of the greats! Love videos like these.

[__Wanderer]

Great video! Value investing for the win :D

[rotoristworkshop]

Thank you for putting this video together. love your style!

[dylongarrett]

Michael - you are growing so fast. 💨

I remember when you had the same number of subs as me.
Will you do a video on your YouTube income streams?

[hassaninvesting]

As always you have to look at a company as a business instead of it as a stock ( ticker ) .

[unitedhustlersofamerica]

Are you still commenting on every video to grow your channel or what’s the strategy now? I noticed when leave comments sometimes YouTube doesn’t even let them show up because I do it so much.

[zgreg]

All this research and time spent and you lag index funds. At what point do you say you shouldn't pick individual companies and buy low cost index funds? Circle of competence is one rule everyone ignores.

[unitedhustlersofamerica]

How do you grow your channel now if you aren’t commenting anymore?