Warren Buffett: Investing tips

Some call Warren Buffett the Oracle of Omaha. He became one of the richest men in the world by following some very basic investing rules. MSN Money has put together Buffett's list for smart living and savvy investing.

Lesson #1: Be frugal. That's how Buffett lives. How will this make you a better investor? First, like Buffett, it gives you more to invest; second, it makes you demand the same quality from others which keeps excess and waste in check; and third, frugal people don't need fast returns to support extravagant lifestyles.

Lesson #2: Look for a "fat pitch.” This is a baseball reference. It means resist the itch to constantly buy or sell stocks. Have the patience to wait until the market brings you a "fat pitch" to hit (which is how Buffett describes a stock trading at a great value).

Next lesson: Be a contrarian. Go against the crowd. Be skeptical of conventional wisdom, not because the crowd is necessarily wrong but because the crowd's wisdom is probably already reflected in market prices. When investors are negative, that's usually a good time to buy; when they're confident, be careful!

Another of Buffett's basic rules is to stick with what you know. If you don't understand a company's product or how it makes money, Buffett says you should stay within your “circle of confidence” and avoid it.

Lesson: Don't depend on others to say you're right. If you need constant acknowledgment about your investment decisions, you won't be able to invest like a master. Buffett has made a fortune by purchasing disliked value stocks that are so beaten down, you rarely hear experts talking about them on TV.

Lesson: Buy companies cheap. The first step is to look for what Buffett calls the "intrinsic value.” It's the present value of all the cash the company will generate in the future. Buffett doesn't pay much attention to the common measure of value, Earnings per Share, instead, he looks for little debt and good return on equity.

Lesson: Hold for life. Buffett has said his favorite holding period is forever. The idea is to invest in companies good enough to outperform for decades. This doesn't mean buy and forget. Buffett tracks investments closely and gets out when he thinks they're fully valued.

And one last pearl of investing wisdom from Warren Buffett -- believe in America. Buffett has a history of not tweaking his portfolio based on what party is coming into office or where we are in an economic cycle. Put your money to work even when it seems others have lost faith in the U.S. economic system.

Jan Hýsek