8 Lessons Traders Can Learn from Warren Buffett

by Darrin Donnelly on November 9, 2010

What can traders learn from Warren Buffett?

What can traders learn from Warren Buffett?

Warren Buffett’s investment philosophy and Nicolas Darvas’ are almost polar opposites of each other. 

Buffett buys companies with a timeframe of decades, not weeks or months.  He primarily buys older, established, “basic business” companies and avoids the latest rapid-growth companies. 

Where Buffett is perfectly fine with sitting through a deep, multi-year portfolio drawdown caused by a bear market, the Darvas trader exits positions quickly when the market declines and often takes short positions to profit from a bear market.

While I encourage traders to implement some type of long-term investment strategy to compliment their trading accounts (in fact, I compliment my trading with a systematic long-term approach based on the teachings of, you guessed it, Warren Buffett), there’s no doubt that the Darvas method is almost completely contrary to the strategy used by Warren Buffett.

Yet, there is actually a lot traders like us can learn from the master of value investing.

Here are eight principles epitomized by Warren Buffett that should also be embraced by successful traders.

1. Be True to Yourself

The world’s wealthiest investor hardly typifies the Wall Street cliché of a Gordon Gekko-esque wheeler and dealer.  Buffett shuns the expensive suits, the glitzy Big Apple galas, the Greenwich mega-estates, and the fast-paced, jet-setting, limousine-riding, globe-trotting living that most people think of when they think of hot-shot billionaire fund managers. 

Instead, Warren Buffett is more appropriately seen as a typical Midwestern grandfather.  He spends most his days reading and most his evenings playing bridge.  His big outings are to minor league baseball games, college football games, and quiet dinners at the local steakhouse. 

This is who Buffett is and he doesn’t apologize for it.  He doesn’t try to be something he’s not.  He’s not trying to impress others or prove himself to the outside world.  He’s a Midwesterner who likes the quiet life. And thus, he’s developed his business around his preferred lifestyle; not vice versa.

Successful traders can relate.  Their independence is perhaps their highest value and one of the greatest motivations for life as a trader is not so much the money as it is the freedom to live life exactly as you design. 

Trading to impress others is a recipe for disaster.  Trading in order to live the life you dream of and to be who you truly are; now that’s a worthy goal.

2. Separate Yourself from the Wall Street Noise Machine

Now here’s a lesson that Nicolas Darvas and Warren Buffett most definitely would agree on.

Just as Darvas found that his trading improved the more he separated himself from the news and opinions endlessly spouting from Wall Street, Buffett also shunned working on Wall Street early in his career.  Darvas chose to spend much of his traveling around the world while Buffett set up shop in the middle of America’s heartland.

Both Buffett and Darvas found that they could make much better decisions when they didn’t allow themselves to be inundated with the noise constantly coming from Wall Street. 

3. Find Your Passion and Live It

When asked about the “key to success” in life, Warren Buffett often advises college students to find what they love to do and then find a way to make money doing it.

Buffett absolutely loves what he does.  He says he “tap dances to work” every day. 

Successful traders feel similarly about their chosen path. 

Traders love analyzing charts and reading about hot new industries and businesses.  We love the stock market and the tremendous opportunity it offers to anyone and everyone, no matter their background.  We love the game that is trading.

To succeed as a trader, you have to have a true passion for it.

4. Wait for the Perfect Opportunities

Warren Buffett is known for quoting legendary baseball player Ted Williams, who stated: “To be a good hitter, you’ve got to get a good ball to hit.”  Meaning, you shouldn’t be swinging at every pitch.  Instead, you’ve got to be patient and wait for the perfect pitch to come along.

This same is true for traders. 

Just as Buffett famously sits on a tremendous amount of cash, waiting for just the right investment opportunity to come along, traders have to be disciplined and avoid over-trading. 

Chasing the excitement of a new trade is the downfall of many wannabe traders. 

Successful traders, on the other hand, are patient and wait for just the perfect technical and fundamental setups before pulling the trigger and entering a trade.

5. Believe in Yourself and Your System

I’m often struck by the level of self-confidence Warren Buffett exudes whenever he talks about his investment decisions. 

Buffett has often described how he’s genuinely never worried about his investments working out in the long run.  This is because he believes in himself and his ability, and because he believes in his chosen approach to investing. 

When Buffett fist learned about the investment strategies of Benjamin Graham, Graham’s value approach immediately clicked with him.  After years of research, Buffett felt he had found his holy grail to investing.  This system made sense to him and fit his philosophy.

Traders can relate to this light-bulb moment as well.  For Buffett, it was learning Graham’s value approach.  For a Darvas trader, it was discovering the Darvas System.  

Regardless of the chosen path, you have to “click” with the system you embrace.  Something inside has to tell you: “Yes, this makes sense to me.  This works!” 

When you truly believe in yourself and your system, you’ll be able to withstand the temporary setbacks and moments of doubt.  You’ll commit to your game plan and persevere through the adversity you face along the way.

6. Adapt to Changing Conditions

Like all successful people, Warren Buffett has shown the ability to adapt to changing environments. 

Buffett’s investment philosophy has evolved through the decades.  He’s added Phillip Fisher “growth” principles to his Benjamin Graham “value” ideals.  He’s learned from brilliant minds like his co-pilot Charlie Munger and close friend Bill Gates.  He’s recognized that there are great opportunities in investing outside of the U.S., something he avoided in the past.

Buffett has chosen to accept change instead of resisting it.   He recognizes what he DOESN’T know (and avoids investing in technology for this reason), but he also recognizes when what he once felt confident about no longer works the way it once did. 

The newspaper industry is a perfect example.  Buffett has made an incredible fortune buying newspaper companies and he LOVES the newspaper industry and feels it’s an essential aspect of America. 

Yet, Buffett now concedes that the newspaper business, for the most part, is dying a slow death.  For this reason, after careful consideration, Buffett has passed on recent opportunities to buy struggling newspaper companies.

A trader must adapt to changing conditions as well.  What worked years ago, or even months ago, may not be working today.  While the overall philosophy of your trading system should not be tampered with, it’s important to evolve with the current market. 

The Darvas System has evolved a great deal since it was introduced to the world 50 years ago.

7. Read, Read, Read, and Read Some More

To succeed in any endeavor, you can never stop learning.  

Buffett’s billionaire colleague Charlie Munger once stated, “In my whole life, I have known no wise people over a broad subject matter area who didn’t read all the time – none, zero.”

Buffett and Munger are both well-known for the incredible amount of reading they do.  They begin each day with stacks of newspapers and then devour everything from annual reports to historical biographies throughout the day. 

Traders must do the same.  Read and re-read the classic trading books (like those found in the Darvas Store).  Hammer home the principles found in such books.  I’ve read some of the better trading books a dozen times or more and still continue to find new tidbits of imperative information.

Read books about the trading and investment systems that may not have anything to do with your particular strategy.  You never know when you’ll find some new tactic to add to your repertoire. 

Read the daily newspapers, discover new companies and new technologies, read the biographies of great successes, make it a habit to read self-help and success books. 

Knowledge is power and it’s no accident that time and time again, we find that most of the great successes of our time happen to be voracious readers.

8. Have Fun and Don’t Take Yourself Too Seriously

From his self-deprecating humor to his ukulele-playing to his witty one-liners, one thing is clear about Warren Buffet: he has a lot of fun with his life.

Buffett also admits his mistakes.  He laughs about his mishaps.  He pokes fun at himself.  In short, he doesn’t take himself too seriously.

To be a successful trader, you need to believe that trading is a blast; you need to have fun learning about and actually going through the process of trading. 

You also need to accept that you’re going to make a lot of mistakes.  That’s part of the game. 

Like so many great traders, Nicolas Darvas had a lot more losers than winners.  But, he cut his losses quick, admitted his mistakes, and then went on to the next opportunity. 

Darvas prepared his ego for the fact that he would take many small losses in exchange for a few gigantic winners.  This approach made him a multi-millionaire.

There are a lot of traders out there who approach the trading day as though they’re constantly in a vicious battle to survive, barely hanging on by a thread.  They’re over-stressed, over-worked, and walking around with queasy stomachs. 

To me, that doesn’t sound like much fun.  If you don’t think trading is fun, then you have to ask yourself: what is the point of being a trader? 

If you find losing trades unbearable for your ego to accept or if you find that trading brings you nothing but more stress, then perhaps you should consider a different profession. 

Warren Buffett’s example forces us to ask the question: How much more successful could we all be – regardless of our chosen professions – if we simply learned to have more fun and not take ourselves so damn seriously all the time? 

Something to consider as you plan your goals…

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Interested in trading with the Darvas System?  Get a list of all the current Darvas Stocks – with exact buy points and sell points – in the latest issue of Darvas Trader PRO.

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