Warren Buffett shares 5 requirements for making money in the stock market


Warren Buffett has decades of investment success under his belt — and the multi-billion dollar net worth to prove it. Fortunately for the entire investment community, he shares his expertise in annual interviews and letters to Berkshire Hathaway (BRK.A -1.32%) (BRK.B -1.29%) shareholders.

In Buffett’s 2020 letter to shareholders, he identified five conditions for making money in the stock market.


The long-term average annual growth rate of the stock market is approximately 7%, net of inflation. But you won’t earn that 7% every year. You could lose 20% this year, gain 8% next year, grow another 10% next year, and so on. As the years pass, the good years eventually overtake the bad.

The longer you stay invested, the better your chances of realizing positive returns. You’ll probably see gains over 10 years, but a 20 or 30 year timeframe almost guarantees you’ll make money. Historically speaking, the stock market has never lost value over 20 years or more.

2. Inner calm

Stay calm and you can make informed decisions in the face of market turbulence. Get nervous and you’re more likely to make short-sighted moves that you’ll later regret.

Do you remember March 2020? The growing coronavirus pandemic has struck fear into the hearts of investors. In just over a month, the S&P500 fell 34%. Those who stayed calm and waited for a reversal saw their account values ​​restored before September.

Those who liquidated during the month-long decline likely did not recoup their losses in September. They accepted temporarily lower stock values ​​as permanent – ​​and paid a high price for that decision.

3. Diversification

Diversification spreads your risk across multiple stocks, sectors and asset classes. By owning assets that each behave differently, you minimize the risk of all your positions collapsing at the same time. Instead, some will go up while others will go down.

This mix of gains and losses results in smoother performance over time. And smoother performance leads to better performance because you avoid the most extreme setbacks.

4. Minimum Transactions

Buffett’s reference to minimizing trades is a nod to the buy-and-hold investing strategy. You practice buy-and-hold by choosing high-quality stocks or funds and holding them in your portfolio indefinitely. The only time you would sell is if the company’s long-term prospects have fundamentally deteriorated.

As a long-term investor, you seek to generate gains from long-term price appreciation. This is very different from the investor who buys and sells frequently to take advantage of short-term market trends.

5. Minimal fees

Investment fees directly reduce your returns. And unfortunately, there are many types of fees that apply to investors. You could pay account fees in your 401(k), management fees to a financial advisor, sales fees on mutual funds, and administrative fees on mutual funds and exchange-traded funds ( AND F).

Some of these fees are worth paying. Your 401(k) expenses make sense, for example, when your retirement account generates thousands of free employer contributions each year. Likewise, ETF administrative fees can be a good trade-off if you prefer the convenience of ETFs to individual stocks.

Nevertheless, you can work to reduce the fees you accept. Fund administration fees are your handy fruit here. Always compare a fund’s expense ratio to its peers before investing. Pick the fund with the lowest ratio and you’ll likely get higher returns over time. Fortunately, there are plenty of fund options with expense ratios of 0.1% or less.

take the long road

Buffett’s approach is obviously not a get-rich-quick scheme. It’s something better: an enrichment strategy.

Give yourself time, stay calm, diversify, invest in long-term price appreciation, and keep an eye on those fees. This is the formula. Follow it now and reap the rewards in the decades to come.

Catherine Brock has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.


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