Mr. Warren Buffett is the greatest investor of all time, there is very little doubt about that.  The people that have read my blogs before on the man understand that people want to emulate him as an investor but I do not think they realize how impossible that is.  They espouse buy and hold, but Mr. Buffett does anything but that, he is very active in the companies he buys and although he is primarily in for the long run, he is in no way passive.

But this article is not about that, this article is about the four most important points that I took away from this letter that I truly think will help people become great investors.

1) You must earn a high rate of return over time.  Throughout the time of Berkshire Hathaway, the overall return is a staggering 1,826,163%, which equates to an average annual return of 21.60% compounded over the 50 years.  Most investors are content with a 10% return before taxes and inflation, no wonder that people have a tough time financing their retirement years.  Investors must need to expect more.

2) You must earn these high rates of return over a long period of time.  The time value of money is one of the most important concepts in modern portfolio theory.  Staying invested is the key, but being able to put up mammoth returns every year takes something special.  It takes an understanding of how to put together portfolios with both longs and short positions and a blending of technical analysis and fundamental analysis.

3) No when to take a loss.  This is a point which I do not think people understand very well, no risk management and no concept of when to cut a loser.  A big loser in a portfolio will kill your returns.  You must learn to spot a bad investment and without any emotion be willing to rid yourself of that security or at least hedge out a lot of the risk.

4) Consistent bad behavior will ruin your chances of financial security.   Wall Street veterans revel in the idea that the mom and pop investor will consistently buy high and sell low or be out of the market during the major run.  We kind of count on it to help bolster our returns.  A good example away from the stock market is all of those people that were flipping homes in 2007, just before the big crash.  If you do not have the tools or your advisor does not have the tools to not act in this way, then your money is better off under the mattress.

There are always great things to learn from the smartest people out there.  I think that people’s financial lives will be much better when they learn how to act with these four principles in mind.

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