No investor’s education is complete without understanding the legacy of Warren Buffett. Known as one of the greatest investors of all time, Buffett’s track record speaks for itself. In 1965, he gained control of Berkshire Hathaway, a struggling textile company, for around $15 per share. Since then, he’s transformed it into a massive conglomerate, now trading near $700,000 per share. Since Buffett’s takeover, an investment in Berkshire has grown at nearly double the rate of the S&P 500, delivering returns over 140 times those of the index.

While there is much to learn from Berkshire’s fundamentals and 60 years of growth, this article focuses on the psychology behind Buffett’s investment strategies. My goal is to help you think like Buffett and improve your own investing — not to persuade you to buy shares of Berkshire Hathaway. Let’s explore the principles and practices of Buffett’s investing.

Focus on the business behind the stock

Early in his career, Buffett invested in low-cost companies regardless of their underlying fundamentals. While his early investments paid off, he learned it was better to focus on companies with strong fundamentals, even if they cost more. He is famously quoted as saying, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

To be fair, Berkshire has the resources to acquire entire companies—and often does. While lay investors like us won’t make purchases on that scale, we can adopt the same mentality.

Here are three principles to help you put this mindset into practice:

1. Research and learn how to value companies

Buffett emphasizes the importance of investing like you’re buying the whole business. This means evaluating the company’s cash flow, product range, market position, and future potential.

Let’s be clear: thorough research takes time. It might be tempting to rely on social media or your favorite analysts for quick answers, but blindly following can be risky. If you can’t commit to understanding your investments, you’re better off sticking with an index fund.

The financial industry is full of mediocre personalities who can’t help when they’re wrong. If you’re trying to be your own financial advisor, you need to know the company you’re investing in through and through.

2. Think rationally and avoid emotional trades

Because Buffett’s strategy involves finding excellent companies at a fair price, he often misses out on big moves when he disagrees with the market’s valuation. A company’s popularity doesn’t make it a wise investment.

The stock market reflect expectations about the future rather than current realities, making the market speculative and unpredictable. Many companies rally on speculation or news, only to lose that growth later. Don’t let emotions or fear of missing out trap you in a bad investment.

3. Learn when to hold and when to let go

Buffett is often associated with a buy-and-hold-forever approach, but this doesn’t mean he always keeps his investments forever. For example:

• IBM: Held from 2011 to 2018. Buffett sold all shares after the company failed to adapt to new competition in the industry.
• Airlines: Held from 2016 to 2020. The Covid pandemic disrupted the travel industry, leading Buffett to exit all airline stocks by April 2020.
• Wells Fargo: Held from 1989 to 2022. Buffett sold his position entirely due to a loss of confidence in the bank’s leadership following its fraudulent accounts scandal.

In short, Buffett’s investment confidence comes from the company, not the stock price. If the underlying fundamentals change, it may be wise to reevaluate your position and make necessary adjustments.

Practice patience and trust the process

You may have heard one of Buffett’s famous quotes, “The stock market is a device for transferring money from the impatient to the patient.” This sentiment is often echoed in investing circles, but retail investors rarely follow it. The stock market can help you build sustainable, lasting wealth — but only with the right approach.

Covid fears in 2020 triggered a market-wide crash, with sectors like oil and transportation taking the hardest hits. Meanwhile, niche stocks such as Zoom and Peloton soared during the post-Covid recovery, and meme stocks like GameStop and AMC gained massive followings on social media.

As the dust settled, the market began to self-correct. Pandemic favorites tumbled from their inflated valuations while strong companies regained stability. Indices — especially those heavily weighted in tech — have all but erased any sign that the US entered a recession in 2020.

Continue learning how to invest wisely

Buffett bought his first stock at the age of 11, setting him on the path of investing. He earned a Bachelor of Science in Business Administration from the University of Nebraska and a Master’s degree in Economics from Columbia University. At Columbia, he studied under Benjamin Graham, who became his mentor and introduced him to the principles of value investing.

Buffett valued education from an early age, and today’s investors have unprecedented access to information. With vast libraries of educational materials at our fingertips, we have resources that past generations of investors could only imagine. We should not let it go to waste.

Reading books, analyzing financial reports, listening to podcasts, and watching videos are great ways to expand your knowledge and make informed decisions. However, it’s important to be cautious if you’re learning from social media personalities. I find that the most successful investors often base their strategies on lessons from the past rather than fleeting fads.

Understand Buffett’s aversion to risk

It’s important to understand Buffett’s current position and how it differs from the ordinary investor. In Berkshire’s most recent letter to shareholders, Buffett wrote:

“Extreme fiscal conservatism is a corporate pledge we make to those who have joined us in ownership of Berkshire. In most years – indeed in most decades – our caution will likely prove to be unneeded behavior – akin to an insurance policy on a fortress-like building thought to be fireproof. But Berkshire does not want to inflict permanent financial damage… Berkshire is built to last.”

Simply put, Buffett’s priority is now to the shareholders. He’s already built his wealth and now he needs to preserve it. To achieve meaningful performance, Berkshire would need to acquire substantial stakes or entire companies, but Buffett doesn’t see many opportunities out there.

Buffett’s aversion to speculative assets like Bitcoin and surging AI stocks like Nvidia should remind us to prioritize sustainable, value-driven investments over short-term speculation.