Trading Insights From Legendary Investor Warren Buffett

4 trading insights from Warren Buffet, with explanations

Warren Buffett speaking to students at Kansas University School of Business
Warren Buffett speaking to students at Kansas University School of Business. Mark Hirschey

Warren Buffett is widely regarded as one of the best investors of our time. This leads many people to falsely assume that all of Warren Buffett's fortune--about $63 billion in 2015, according to Forbes--came from buying and selling stocks. Warren is also a wise entrepreneur and businessman, which has attracted billions in capital to his ventures. He is also the CEO of Berkshire Hathaway, a company that generates money in ways individual investors like you and me cannot.

There is more to Warren Buffett than just buying and selling stocks. Knowing how Warren Buffett views the markets won't necessarily make you a millionaire or billionaire. That said, when Warren talks the world listens because he's a smart man and has spent a life time around the financial markets. Here are some great Warren Buffett financial quotes that all investors should study and dig deeper into.

 The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch.

This is the greatest advantage traders and investors have, and yet most don't realize it. You decide when to put your chips in, and you only need to do so when your research and analysis tells you NOW is the time to trade. Don't try to catch every move in the market. Look for high probability trades, even if you have to wait for them. If you swing at every pitch (market move) your mental energy, and capital, will be gone before the good opportunities come along.

For more on this topic see How Action Bias Sabotages Your Trading.

Ben Graham taught me that "Price is what you pay; value is what you get."...I buy quality merchandise when it is marked down. 

Whether you are a day trader, swing trader or investor, look for a great price. To a day trader that may be buying or shorting on a pullback during an uptrend or downtrend on a one minute chart.

A swing trader may wait for the pullback to appear on the daily chart. An investor waits for bigger pullbacks, or signs of value such as a low P/E ratio in a company with great growth potential over the next decade. When prices are rising there's a compulsion to get in because we are afraid of missing the move. Don't swing at every pitch, let trades come to you. Trade on your own terms, and only buy when a stock offers a great value. 

You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

This quote is related to the two prior ones: don't swing at everything and buy quality on sale. But how do you do that? Have a plan for how you will trade. Look at history--it is has rewarded buyers of the S&P 500 (or a large basket of stocks) when P/E ratios drop below over the long-term. P/E ratios are not the only consideration in an investment decision, but it's a good example. Create a plan for how you trade, based on tendencies that are present when stocks tend to reverse. Then only trade when all those conditions are present.

Day traders and swing traders don't typically use much fundamental analysis to make their trading decisions, but the process is the same. Shorter-term traders must only trade when there is a valid reason for doing so--when there is a great opportunity. That sometimes means taking lots of trades, and sometimes means taking almost none for long periods of time. 

If...history was all that is needed to play the game of money, the richest people would be librarians.

Studying history and making a great trading plan won't make you a great trader, or even a profitable one. Greater traders have a grit that allows them to buy things on sale when everyone else is selling. But that is only part of it. Not all investments will turn out well. If a trade doesn't proceed as expected, cut the loss. Consider this before the trade, and prepare yourself for the possibility of the trade not moving in your favor.

This mental fortitude to go against the herd (and much of the herd loses money)--and stick to a plan, and still be able to cut losses if a trade doesn't pan out--means trading is more psychological than mechanical. The best research and strategies in the world mean nothing if you don't follow them (see Avoid Choking When the Stakes Are High).

Final Word

Investing like Warren Buffett won't make you a billionaire or even a millionaire. There is much more to Mr. Buffett's wealth than just buying and selling stocks. That said, as one of the world's richest men we can all learn a lot from Warren. Here we learned that you don't need to trade all the time, instead wait for great opportunities. Great opportunities don't come along every second, so be prepared to sit and wait for them, but pounce when they occur. Finally, all the preparation and history lessons in the world mean nothing if you don't have the mental fortitude to see a plan through.