The Secrets of Buffett's Success

Two bits of advice stand behind Warren Buffett's recent success during the economic recovery – buy when everyone else is selling and stand pat when everyone is buying.

Back in late October of 2008, when the stock market was falling off a cliff, Warren Buffett started to buy stocks and urged others to do the same. When the market hit its low the following March, critics implied that the Sage of Omaha was perhaps merely human after all. After taking a look at the results for Buffett’s Berkshire Hathaway, those critics may have to do an about-face. Net earnings were up more than 60% last year, and the price of Berkshire Hathaway’s Class A shares has jumped more than 70%.

In his annual letter to Berkshire Hathaway shareholders, Buffett ticked off some of the strategies that underlie his investing approach. Two bits of advice stand behind his recent success during the economic recovery — buy when everyone else is selling and stand pat when everyone is buying. A climate of fear is an investor’s best friend, says Buffett in his letter, and if you hold off buying when everyone else is doing the same, you’ll have the cash to lay out when stocks are falling.

At the heart of Buffett’s investing style is thinking long-term. If you can’t predict what an industry will look like in 10 to 20 years, don’t put your money into it. It didn’t take a genius to see that airlines and automobiles had a bright future, says Buffett, but few investors were astute enough to pick the companies that would survive the all-out competition in those industries.

Another piece of Buffett wisdom suggests that you avoid companies if you don’t understand what they do or how they make money. This attitude served Buffett well when he avoided the dot.com bubble, commenting that he didn’t know enough about the way dot.coms planned to make a profit to feel comfortable investing in them.