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Warren Buffett is often hailed as one of the greatest investors of all time, if not the greatest. That might not be news to you, but you might not appreciate just how good his record is. Consider this, then: He has led his company, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), to a 2,744,062% increase in its share price from 1964 through 2019. That’s a compounded annual gain over 55 years of more than 20%, which would have turned a $1,000 initial investment into more than $21 million.

So who better to look to for some valuable investing lessons? Here are five lessons from Mr. Buffett that can make you a better investor.

Image source: The Motley Fool.

No. 1: Start early and be patient

Buffett has grown as wealthy as he has in large part by starting early and patiently staying the course. His track record at Berkshire Hathaway spans more than five decades. The table below shows how a single initial $1,000 investment can grow over long periods at different growth rates:

Growing for

Growing at 5%

Growing at 10%

Growing at 20%

10 years

$1,629

$2,594

$6,192

20 years

$2,653

$6,728

$38,338

30 years

$4,322

$17,449

$237,376

40 years

$7,040

$45,259

$1.5 million

50 years

$11,467

$117,391

$9.1 million

60 years

$18,679

$304,482

$56.3 million

Source: Calculations  by author.

Those are some impressive numbers coming from a single $1,000 investment. Imagine how much bigger they would be if $1,000 (or more!) were invested every year. If you have long enough, you can amass meaningful sums even with a modest growth rate — Buffett’s hefty growth rate isn’t necessary.

No. 2: Growth rates can slow as your portfolio grows

If you take a close look at Berkshire Hathaway’s annual gains over each year between 1964 and 2019, you’ll notice a few things. For example, between 2010 and 2019, there was only one year with a 30%-plus gain, but there were four such gains between 1970 and 1979, seven between 1980 and 1989, and five between 1990 and 1999.

Berkshire’s growth rate has slowed as it has grown huge — and Buffett has warned investors not to expect the growth rates of the past. In his 2017 annual report, he wrote to shareholders: “In the years since present management acquired control of Berkshire, our book value per share has grown at a highly satisfactory rate. Because of the large size of our capital base (Berkshire shareholders’ equity was approximately $348 billion as of December 31, 2017), our book value per share will very likely not increase in the future at a rate close to its past rate.”

This is good news for us small investors, though. If we spot a very promising small, young company and want to invest in it, we can — and with any luck, we might profit handsomely from it. But Buffett can’t do that now; even if he bought the whole company, it would be a drop in his bucket. Small investors do have at least one advantage over big ones.

No. 3: Stick to what you know

Next, Buffett is famous for respecting his “circle of competence,” meaning that he knows what he knows and what he doesn’t know, and doesn’t like to invest in companies or businesses he doesn’t understand well. We would do well to do the same. Remember Buffett’s words from his 1996 letter to shareholders:

What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

Hedge fund billionaire Seth Klarman has shared similar thoughts: “Investors who confine themselves to what they know, as difficult as that may be, have a considerable advantage over everyone else.”

No. 4: Do nothing — most of the time

This bit of advice from Warren Buffett may be especially welcome. You don’t have to be a busy investor, checking stock prices all day and buying and selling frequently. In fact, that’s likely to hurt you — especially if you’re a day trader. A famous study by Brad Barber and Terrance Odean in 2000 confirmed that, summarizing: 

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4%, while the market returned 17.9%… Our central message is that trading is hazardous to your wealth.

Buffett has quipped that he would be fine if the stock market was only open for trading once a year. In his 1998 letter to shareholders, he suggested that he was a bit too busy, that year, with regrettable results:

The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald’s was a very big mistake. Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours.

No. 5: Consider index funds

Finally, Buffett has suggested that investors consider low-fee broad-market index funds for much of their portfolios. He has explained that, in his will, he left these instructions for the money left for his wife: “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”

There are lots of such index funds, offered by Vanguard and many other financial companies. The SPDR S&P 500 ETF (SPY) is worth considering, as an example; it will distribute your assets across about 80% of the U.S. stock market. The Vanguard Total Stock Market ETF (VTI) or the Vanguard Total World Stock ETF (VT) are also good choices, respectively investing you in the entire U.S. market, or just about all of the world’s stock market.

There’s much more you can learn from Warren Buffett and his company, Berkshire Hathaway. Spending a little more time gathering more insights and lessons can boost your long-term portfolio performance.