Warren Buffett. A name synonymous with investment in America.

Each year, Warren Buffett writes a letter to the shareholders of Berkshire Hathaway Inc., his investment holding company headquartered in Omaha, Nebraska. Up until 2023, Charlie Munger—who Buffett referred to as the "architect" of Berkshire—had also participated in the writing of these letters. Munger died at the ripe age of 99, on November 28, 2023, so now, the mantle has passed to Buffett alone.

In Buffett's shareholder letters, he shares insights into his company's operations, investments, successes, and failures. Letters available online date back to 1977, and represent a treasure trove of financial wisdom from one of the most famous investors of all time.

In this article, we will explore five pieces of wisdom, distilled straight from Buffett's shareholder letters.

As always, remember that this information is not intended as a recommendation. Investment decisions should always be made based on an investor's specific circumstances. There can be no assurance that any particular investment objective will be realized or any investment strategy seeking to achieve such an objective will be successful. However much Buffett's wisdom might help, investing involves risk, including the possible loss of principal.

With that out of the way, let's get into our five favorite pieces of investing wisdom from Warren Buffett.

Warren's Wisdom #1. Invest in Good, Fundamental, and Enduring Businesses

Warren Buffett states that the goal of Berkshire is simple: "To own either all or a portion of businesses that enjoy good economics that are fundamental and enduring." You might not be in the business of owning entire businesses, but the principles are what's important here:

• Investing for the long-term. Businesses with a solid financial foundation, such as strong demand for their products or services, offer an enticing case for long-term value creation. Likewise, steer clear of businesses that could become financial "sinkholes", or those that chronically consume more capital than they produce.
• High returns. Look for businesses that can effectively reinvest profits into their own operations to compound value over time. For example, think of how Apple spends the money it earns on the research and development of new products.
• Trustworthy management. Seek businesses managed by capable and honest leaders. Buffett says that this judgement can be difficult to make, but it can mean the difference between an investment that pays off and one that goes sideways.

Take the next steps in your financial plan and meet with a Wealth Enhancement advisor.

Warren's Wisdom #2. Never Risk Permanent Loss of Capital

You not only need to make good decisions; you also need to lessen serious mistakes. High on Buffett's list of investment rules at Berkshire is to never risk permanent loss of capital. This means steering clear of high-risk ventures that could result in significant financial loss. Some losses are inevitable, but you want to reduce total ruin that can put you out of the game for good.

This principle reflects Buffett's general approach: long-term value investing. By identifying businesses with strong fundamentals, and buying shares when prices are favorable, you can manage downside risk. You might have heard his famous quote before: "Be fearful when others are greedy and be greedy when others are fearful." For Buffett, patience is a virtue.

Warren's Wisdom #3. Hold Cash

Conventional wisdom might say that holding cash isn't a prudent investment move, but Warren Buffett disagrees. By holding "far in excess" of cash and U.S. Treasuries of what is typically deemed necessary, Berkshire was able to bounce back during the 2008 stock market crash, generating cash from their operations.

As he stated in his 2023 shareholder letter: "We did not predict the time on an economic paralysis, but we were always prepared for one." By exercising exceptional fiscal conservatism, such as by holding much more cash than deemed necessary, they were able to manage inflicting unnecessary financial damage to their shareholders during difficult times.

Aside from investing, this approach is also present in prudent financial planning, such as in the form of the emergency fund. As Wealth Enhancement Group Portfolio Manager Ed Silversmith, Jr. said, "A lack of an emergency fund is usually what leads to overextension on credit cards to begin with." In the same sense, overleveraging your investments without sufficient cash reserves can lead to drastic consequences.

Warren's Wisdom #4. Don't Pick Stocks—Pick Businesses

As should be becoming apparent by now, Buffett is in the business of picking businesses, not picking stocks:

• Focus on the fundamentals. Look back to the first piece of wisdom we highlighted above. The fundamentals of demand, trustworthiness, long-term potential, and favorable economic characteristics are what drive Buffett's investment decisions.
• The market is not rational. According to Buffett, "efficient" markets only exist in textbooks. Stocks can commonly trade at surprising prices, both high and low, for a variety of different reasons. These reasons only become understandable in retrospect—but by then, it can be too late.
• Watch the hype. Don't just go looking for the hottest new stock that everyone is excited about. Buffett himself states that "Berkshire is not big on newcomers." Two of Buffett's most successful investments, Coca Cola and American Express, were founded during the 1800s. How much of your portfolio investments were founded over 100 years ago?

Warren's Wisdom #5. A Few Winners Work Wonders Over Time

Investing is all about high-leverage decisions. Buffett says that, over the course of his 58-year management career at Berkshire, most of his allocation decisions were no better than "so-so". However, his best results were the product of "about a dozen truly good decisions", or one good decision about every five years. Sometimes, it can come down to luck, but it's really about finding the right businesses to invest in.

Here's a quote directly from Buffett that states the lesson aptly: "The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders."

He then added: "And, yes, it helps to start early and live into your 90s as well."

Bonus Wisdom: Munger's Musings

Our list would be incomplete without some musings from Charlie Munger's desk. We'll leave it to you to interpret the lessons here:

•  "Don't bail away in a sinking boat if you can swim to one that is seaworthy."
• "You don't need to own a lot of things in order to get rich."
• "You have to keep learning if you want to become a great investor. When the world changes, you must change."
• "You can learn a lot from dead people. Read of the deceased you admire and detest."

Financial Wisdom for the Ages

The fundamentals on this list might be new to you, but the portfolio managers at Wealth Enhancement Group breathe investment wisdom day in and day out. If you're looking for assistance with your portfolio, or if you have other questions about how to augment your financial planning approach, schedule a free, no-obligation meeting with a Wealth Enhancement Group financial advisor today.