Warren Buffett's GreatestWisdomTable of Contents

Warren Buffett's Greatest Wisdom

Who's Swimming Naked?

Buy Wonderful Companies

The Best Holding Period

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Warren Buffett's Greatest WisdomAccording to Forbes' latest list of worldwide billionaires, Warren Buffett is worth more

than $50 billion.

The octogenarian’s massive fortune was built through Berkshire Hathaway (NYSE:

BRK-A)(NYSE: BRK-B), the company he’s been a controlling shareholder of since 1965.

Since that time, Berkshire’s stock has appreciated nearly 600,000% (no, that’s not a

typo!) versus 7,400% for the S&P 500 index.

At that rate of return, a $1,000 investment in Berkshire would have become roughly

$6 million.

Much of the success at Berkshire has been driven by Buffett’s uncanny skill as an

investor. During his career as CEO, he’s made billions for the company and its

investors by buying top-notch companies like American Express (NYSE: AXP) and

Coca-Cola (NYSE: KO) and holding the stocks for decades.

There’s a lot we can learn from Buffett

Fortunately, not only has Buffett been one of the most effective CEOs of the modern

age, he’s also been one of the most transparent. For Berkshire, each year is capped by

a letter to shareholders from Buffett that not only details the company’s results, but

teaches readers general investing lessons in Buffett’s down-to-earth, folksy style.

Outside of those letters, Buffett is also known for delivering some of the all-time most

concise, elucidating quips about investing.

In this report, you’ll find three of Buffett’s most insightful pieces of wisdom broken

down so you can understand exactly how to apply them to your investing. You’ll also

find seven stocks you can add to your buy list today using Buffett’s insight.

If you’re ready to dive into the world of Buffett, click below to get started.

Who's Swimming Naked?You only find out who is swimming naked when the tide goes out. – Warren Buffett

Unwise business plans can often lead to huge profits… over the short term. When the

Unwise business plans can often lead to huge profits… over the short term. When the

economy is roaring and everything is moving up and to the right, it’s far easier for

companies to hide dumb, corner-cutting, or even illegal practices as they rake in

profits. Eventually though, the environment changes, those ill-advised practices are

exposed, and the companies employing them -- and their shareholders -- get

punished.

Thinking back to the dot-com boom, online grocer Webvan is a perfect example. After

pricing its 1999 IPO at $15, the stock traded up to nearly $25 -- up 66%! -- on its first

day of trading. So what if the company was losing money, it had a questionable

business plan, the economy was booming, and internet stocks couldn’t lose!

As we know now, it couldn’t last. As the stock market boom turned to bust and the

economy cooled, Webvan’s approach to online retailing -- which only led to mounting

losses -- left investors cold. Unable to fund its massive cash bleed, Webvan declared

bankruptcy in 2001.

Of course, we have a plethora of even more recent examples of businesses caught

swimming naked thanks to the housing bust and financial-market meltdown in 2008.

Chief among those examples is Lehman Brothers, which was an investment bank that

was raking it in prior to the crash by employing large amounts of ultra-short-term

loans to finance risky, complex real-estate investments. When the market turned,

Lehman’s lack of swimming trunks was painfully obvious, and in 2008, Lehman filed

the U.S.’s largest corporate bankruptcy.

Buffett’s “swimming naked” quote provides us with plenty of cautionary tales and

gives us an idea of companies we might want to avoid investing in. If we flip it on its

head, though, it also reveals companies that are great investing opportunities.

For example, let’s look at the credit crisis again. Lehman Brothers declared

bankruptcy, Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) were put into

government conservatorship, and Bear Stearns narrowly avoided bankruptcy by

agreeing to be bought out by JPMorgan Chase (NYSE: JPM). But Wells Fargo (NYSE:

WFC) and U.S. Bancorp (NYSE: USB) both made it through the crisis without reporting

a single unprofitable quarter. Though they both accepted government bailout money,

it’s unlikely that either truly needed it. In fact, Wells Fargo’s chief executive at the time

argued vociferously against taking bailout money, but regulators overruled the

request.

When the tide went out, we saw that both Wells Fargo and U.S. Bancorp not only had

their swimming suits on, but were wearing suits of titanium. The washing out that

came with the financial crisis revealed both banks as great companies to invest in for

the long term. It also just so happens that both are among Buffett’s largest holdings

at Berkshire Hathaway -- in fact, Wells Fargo is Berkshire’s single largest stock holding.

While neither stock is as cheap as it was circa 2009, both are still reasonably priced for

a long-term owner today.

Click here to continue with Buffett’s second best piece of investing wisdom.

Buy Wonderful CompaniesIt’s far better to buy a wonderful company at a fair price than a fair company at a wonderful

price. – Warren Buffett

Interestingly enough, Buffett’s mentor, Benjamin Graham, was quite fond of jumping

at fair companies trading at wonderful prices. Graham termed this “cigar butt”

investing -- as in, he was looking for discarded cigars that still had a few good puffs left

in them. In Buffett’s pre-Berkshire days, he ran with this page from Graham’s book. To

be sure, Berkshire Hathaway itself looked a lot like a cigar butt when Buffett bought it -

- at the time it was a bedraggled textile business that was markedly unprofitable.

Through his career, though, Buffett realized that the real money wasn’t in puffing on

dirty cigar butts. Instead, the big profits in investing come from finding well-run

companies that dominate their industries and hanging onto those companies for a

long time. Of course, Buffett isn’t one to pay any crazy price for a stock, though, so

part of the investment process is determining what a fair price is for the stock and

looking for an opportunity to buy the stock at that price.

Costco (Nasdaq: COST) is a great example of a company that dominates its industry.

Sure, there are other warehouse-shopping clubs out there, but in terms of quality of

operations and management, none stack up. And Buffett -- and even more so his

right-hand man, Charlie Munger -- are not shy about professing their admiration for

the low-price giant. The problem for investors is that it’s highly unlikely we’ll see

shares of Costco trade at true bargain levels unless something dramatically changes

the quality and outlook for the company.

In a similar vein, Visa (NYSE: V) and MasterCard (NYSE: MA) are among a very small,

very dominant group in the growing and highly profitable credit card industry. As the

nature of the global payment system continues to move rapidly away from cash and

toward cards and electronic payments, both of these payment-network operators

stand to rake it in. Just like Costco, though, investors looking for a “blue light” special

on Visa or MasterCard shares will likely find themselves with their hands in their

pockets as long as the major growth and success continue.

It’s not just academic to say that investors who balk at a premium price for these

companies missed out. Over the past five years, the S&P 500 is up 35%. Costco is up

93%. As for Visa and MasterCard, they’ve tacked on an amazing 162% and 127%,

respectively. And investors that bought those companies five years ago weren’t

buying on the cheap. In 2008, Costco fetched an average price-to-earnings multiple of

23.5, while Visa and MasterCard sported respective multiples of 53 and 45.

Today, the stocks of all three of these companies still sport higher-than-average

earnings multiples. But all three are also still top-notch businesses with stellar growth

and profit potential.

Click here to read our final invaluable bit of Buffett’s investing wisdom.

The Best Holding PeriodWhen we own portions of outstanding businesses with outstanding managements, our

favorite holding period is forever. -- Warren Buffett

What do Procter & Gamble (NYSE: PG), Coca-Cola, and Wal-Mart (NYSE: WMT) have in

common? If you said that all three are in Berkshire Hathaway’s portfolio, you’d be

correct. If you said all three are up more than 1,000% over the past three decades,

you’d also be correct. Finally, if you said that at some point during that 30-year span,

each of the stocks lost more than 30% of its value in a relatively short period of time…

well, you’d be correct there, too.

Although the attraction of fast riches in the stock market can have a strong pull, real

investing wealth is built over decades, not months or even years. And if you’re curious

what “real investing wealth” means, consider that a $10,000 investment in Wal-Mart 30

years ago would be worth roughly $600,000 today. But there were at least five periods

over that stretch when Wal-Mart’s stock fell more than 20% over the course of a year.

An investor with a quick trigger finger and a lack of long-term focus might have been

shaken out at any one of those times and missed out on the truly great gains made

possible from owning for the whole period.

If we look at the stocks in Berkshire Hathaway’s portfolio today, it’d be hard to argue

that Coca-Cola is anything but a company worth owning for that “forever” timeframe.

Sure, the stock isn’t particularly cheap (see the previous quote if that concerns you),

and it’s faced headwinds lately in the form of a lousy European economy and a

lackluster soda market in the U.S. But when you think bigger picture in the form of the

company’s brand -- it was ranked the No. 1 global brand in 2012 by brand expert

Interbrand -- its strong market position in its established markets, and continued

growth opportunity in emerging markets, it’s obvious there’s still good reason to own

Coke stock for the next year, five years from now, and 20 years from now.

When it comes to finding an outstanding business with outstanding managers,

Berkshire Hathaway itself would almost certainly need to make the list of companies

worth owning for forever. To be sure, Warren Buffett won’t always be the CEO of the

company, but the way he’s built the business has ensured that there are many great

managers running its many wholly-owned businesses. And with a highly diversified

and high-quality business mix that includes everything from The Pampered Chef and

Dairy Queen to GEICO and NetJets, the company has many avenues for growth the

casual observer may not appreciate. If that’s not enough, consider that there’s a team

of investors -- not only Warren Buffett, but his hand-selected protégés Todd Combs

and Ted Weschler -- that is expertly investing in publicly-traded stocks using all of the

wisdom we’ve just discussed here.

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Fool contributor Matt Koppenheffer owns shares of JP Morgan Chase, Berkshire Hathaway,

and Wal-Mart Stores, but he holds no other position in any company mentioned. The Motley

Fool owns shares of Mastercard Incorporated Common, Costco Wholesale, Berkshire

Hathaway, and Wells Fargo.

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