3 Investing Tips From Warren Buffett That You Shouldn't Ignore

When the "Oracle of Omaha" speaks, it has paid to listen. ------------------------------------------------------------------------------------------------------------------------------------------------------ [View this email in your browser]( We're not sure what this implies, but we're starting with Buffett ... and ending with beer and Mr. Rogers. – Anand Chokkavelu, CFA, Managing Editor of Fool.com TWEET OF THE WEEK --------------------------------------------------------------- [Tweet of the Week: Buffett: The difference between successful people and really successful people is that really successful people say no to almost everything.]( [See all our Tweets!]( 3 Investing Tips From Warren Buffett That You Shouldn't Ignore --------------------------------------------------------------- When the "Oracle of Omaha" speaks, it has paid to listen. Warren Buffett has been dishing out investing wisdom for decades. Most Americans — and many investors — haven't followed his advice, though. That's unfortunate, considering that the company Buffett runs, Berkshire Hathaway ([NYSE:BRK-A]( ([NYSE:BRK-B]( has seen its stock more than double the average annual gain of the S&P 500 since 1965 by adhering to his investing approach. Every year, Warren Buffett writes a letter to Berkshire Hathaway shareholders, and each letter contains nuggets of investing advice. Here are [three of those nuggets]( — one from 40 years ago, another from 10 years ago, and one from this year. 1. Buy stocks in the same way you'd buy an entire business Four decades ago, Buffett told Berkshire shareholders that his philosophy was to "select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety." That's still great advice today. In his letter from March 1978, Buffett wrote that there were four characteristics he looked for when acquiring a business or buying a stock: - He wanted to understand the business. - The business should have solid long-term prospects. - The company's management should be "honest and competent." - The business or stock should be "available at a very attractive price." Those continue to be the criteria Buffett uses, except that he has modified the last point a little and now states the price tag should be "sensible." Following these rules on occasion has caused Buffett to miss out on big opportunities. He has admitted that there are some [stocks that he should have bought years ago but didn't]( notably including Google parent Alphabet ([NASDAQ:GOOG]( ([NASDAQ:GOOGL]( and Amazon ([NASDAQ:AMZN](. Overall, though, using these guidelines for selecting stocks to buy has worked very well for Buffett. 2. Look for an enduring "moat" Buffett has long advocated buying stocks of businesses with [moats](. Just as many castles in medieval times had moats filled with water to protect them from invaders, businesses can have the equivalents of moats today — competitive advantages that keep rivals from taking away market share. In his letter written to Berkshire shareholders in 2008, Buffett listed two examples of enduring moats: being a low-cost producer and "possessing a powerful worldwide brand." He cautioned, however, that "history is filled with 'Roman candles,' companies whose moats proved illusory and were soon crossed." Enduring moats are harder to find than you might think. Buffett noted 10 years ago that his definition of "enduring" caused him to rule out buying stocks "in industries prone to rapid and continuous change." He also stressed that while companies should have great leadership, businesses shouldn't be overly dependent on a superstar CEO. 3. Avoid buying and selling too frequently In his most recent letter to Berkshire shareholders, Buffett pointed out an important investing lesson: "Eschew activity." In other words, don't buy and sell stocks too frequently. Buffett referenced a $1 million bet he made a little over 10 years ago. His wager was that an investment in an S&P 500 index fund would beat the returns of an actively managed portfolio over time. Asset management and advisory firm Protege Partners took Buffett up on that bet, investing in five "funds-of-funds" expected to generate better returns than the S&P 500. They didn't. The good news is that one of Buffett's favorite charities, Girls Inc. of Omaha, won big-time. The initial money put up by Buffett and Protege Partners was moved from bonds into Berkshire Hathaway stock in November 2012. Thanks to this action, the final prize amounted to over $2.2 million instead of only $1 million. Why did the actively managed portfolio lose to an index fund? Buffett pointed out that "during the 10-year bet, the 200-plus hedge-fund managers that were involved almost certainly made tens of thousands of buy and sell decisions." There are [times when you should consider selling a stock]( but too much activity in and out of stocks could cost you over the long run. Success (almost) guaranteed If you consistently follow these investing tips that Warren Buffett has given over the years, the potential for success is high. It's possible that the stocks you buy and hold according to these principles could be low achievers. But the odds are really good that your winners will more than make up for the losers. And if you don't want to go along with Buffett's advice on buying stocks, probably the smartest thing to do is to still follow his example from that 10-year bet and put your money in an S&P 500 index fund. As Buffett noted in his last letter to shareholders, "in 100% of the 43 10-year periods since we took control of Berkshire, years with gains by the S&P 500 exceeded loss years." --------------------------------------------------------------- A Buffett tip you can safely ignore: If you missed it last year, a Business Insider reporter [ate like Buffett]( for a week. --------------------------------------------------------------- Square's Most Important Product of 2019 Square's ([NYSE:SQ]( [2018 priorities]( are pretty well set. It's investing in omnichannel capabilities, financial services, and its international markets. And the company's [first-quarter results]( showed progress on all of those fronts. With regard to financial services, the Cash App is playing a key role. What started as a peer-to-peer payments app is now a tool for the underbanked, enabling direct deposits and in-store payments. Square increased the usefulness of the Cash App by issuing a Cash Card — a prepaid visa debit card — which works just like a debit card in stores and online. The Cash Card could be Square's [most important product in the future]( as it unlocks the possibility to offer merchants a direct line of marketing to consumers, and it opens the door for Square to offer consumer loans to its users. These are two areas with great potential for Square. The new marketing options in Cash App At the beginning of last month, Square introduced "Cash Boost" to Cash Card users. Users can select one of several cash-back rewards for using their Cash Card at specified merchants. Cash Card users can get a wide range of discounts at various retail chains. It's unclear whether Square has a partnership with any of the above merchants or if it's funding the rebates itself. If Square can build up a broad enough user base, it may be able to attract merchants to offer rebates on Cash Card as a form of marketing. There are similar cash-back offer programs already popular with various other banks, so there's clear demand for this type of marketing. Square's Cash Card is already off to a strong start. The company reported Cash Card users were spending at a [$1 billion run rate]( in December. As consumers use the Cash Card for more types of spending, Square is able to collect data on their behavior and enable merchants to get themselves in front of the right audience at the right time. Indeed, [Square's data]( is, perhaps, its most valuable asset. Creating a marketing platform within Cash App is a great way to monetize the app, which has yet to generate meaningful revenue for Square. Square Capital...for everyone Square Capital has been one of Square's most successful ancillary products. Square uses a merchant's data to determine its creditworthiness, and it's able to extend loans to businesses that otherwise might not qualify for a loan through a traditional bank. Square also makes it easy to pay back the loan by taking a share of every swipe. It's easy to see that model extending to Cash Card users, especially if they also use the Cash App as their primary banking tool. Square could determine a person's creditworthiness by examining their spending on Cash App and with the Cash Card. Square could then offer the consumer a loan as a line of credit for spending on the Cash Card, similar to a credit card. It could then take a percentage of every direct deposit or peer-to-peer payment to repay the loan. Consumer loans is big business, and Square rival PayPal ([NASDAQ:PYPL]( built a successful consumer loan program. It built up a portfolio of about $6 billion in receivables, earning relatively high interest rates before it decided to sell the business to Synchrony Financial, a deal expected to close in the near future. PayPal exited the business due to its capital-intensive nature, deciding to free up capital for other things like acquisitions and share buybacks. Square is already deeply entrenched in capital loans. It's issued nearly $2.5 billion in business loans since 2014 — $339 million in the first quarter alone. But it doesn't typically carry the loans on its balance sheet, instead offloading them to banks. Square merely facilitates the loan, which is the position PayPal has settled on as most advantageous. Using the Cash Card as a tool to facilitate consumer loans could be a major development in Square's business. It also creates a virtuous cycle where consumer loans facilitate more engagement with the Cash Card and Cash App, producing additional data, which can further improve Square's business. Square has laid the groundwork for the Cash Card to become the backbone for two big potential products in the future. And we could see it play a much more important role in the business as early as 2019. --------------------------------------------------------------- Competitive intelligence: If you're interested in Square, make sure to read up on PayPal's [recent acquisition]( of the "Square of Europe." --------------------------------------------------------------- SPONSORED [This stock could be like buying Berkshire in 1992]( This Stock Could Be Like Buying Berkshire in 1992 You probably already know Berkshire Hathaway has racked up amazing, life-changing returns over its 50-year history. But you might not know that we've found a much smaller company, 1/30th Berkshire's size, that's closely imitating Berkshire's performance. [Learn More]( --------------------------------------------------------------- 4 Financial Habits You Should Get Into in Your 20s Actually, [this list]( of habits is a good reminder for all ages. - Following a [budget]( - Saving at least 15% of your income (we can debate the exact percentage, but more > less and earlier > later!) - Avoiding bad debt (like credit cards and payday loans) - Being properly insured --------------------------------------------------------------- 4 traffic habits we'd recommend: 1) Zippering with merging traffic 2) Waving when someone lets you in 3) Saving tailgating for football games 4) Really, really, really thinking through bumper stickers and personalized plates. #roadtattoos --------------------------------------------------------------- How to Invest in Craft Beer Most of us don't need numbers to realize craft beer is a trend. A Peter Lynch-like look at any local bar or supermarket shows you the barrage of colors and often-too-clever names. Well, here's a number anyway ... thanks to rising demand, the number of craft breweries almost tripled over five years, standing at 6,372 last year. Three ways to play in the space are: Boston Beer ([NYSE:SAM]( — Maker of Sam Adams Craft Brew Alliance ([NASDAQ:BREW]( — Includes Kona, Redhook, and Widmer Brothers Constellation Brands ([NYSE:STZ]( — Not a pure play like the other two, but includes Ballast Point and Funky Buddha Of course, with the many craft breweries out there, competition can be fierce. [Read on]( for an industry overview and more details on the three companies above. --------------------------------------------------------------- Pricey perspective: While craft brews only [make up]( 12.7% of U.S. beer volume, they make up 23% of dollar sales. --------------------------------------------------------------- FEATURED PODCAST --------------------------------------------------------------- [Rule Breaker Investing]( Mr. Rogers' Foolish Neighborhood Rule Breakers are often loud and abrupt, like the sound of shattering glass. But sometimes the most profound Rule Breakers are quiet — changing the landscape over time with gentle consistency. Fred Rogers, through his long-running TV show, Mr. Rogers' Neighborhood, broke through the noise and brashness of his time with a soft-spoken kindness that shaped generations. Take a trip back to 2002 for this interview that is near and dear to our hearts. [Subscribe on iTunes]( Join the 1,300,000+ people who follow us! 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