The Warren Buffett advice that’s made me money

Here at The Motley Fool, we’re big fans of Warren Buffett. When it comes to generating wealth from the stock market, he’s pretty much in a league of his own (near-20% annual returns since the mid-1960s).

Here, I’m going to highlight three quotes from Buffett that have made me money over the years. In my view, this is some of his best investing advice ever.

Investing made simple

Investing doesn’t need to be complicated. And Buffett summed this up well when he said:“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now.”

As soon as I started to follow this advice, and focus on companies with strong earnings growth, my returns improved dramatically. Because, ultimately, it’s earnings growth that leads to share price growth in the long run.

So these days, one of the first things I look for in a company is long-term growth potential. I’m looking for companies in growth industries that are “virtually certain” to have much higher earnings in the future.

One company I’ve been investing in recently that fits the bill here is London Stock Exchange Group (LSE: LSEG). It’s a major provider of financial data (essential for banks and investment managers) and I’d be very surprised if its earnings don’t grow in the years ahead.

Finding businesses with moats

In today’s tech-driven world, we’re seeing a huge amount of innovation. So to reduce risk, Buffett tends to invest in businesses that can’t be easily disrupted or replicated.

These kinds of businesses are said to have wide ‘economic moats’. “The most important thing is trying to find a business with a wide and long-lasting moat around it,” he says.

In recent years, many of my best investments have been companies with wide moats (eg Microsoft). By contrast, many of my worst investments have been companies with tiny moats (eg ASOS).

Going back to LSEG, I think it has a wide moat. After all, it has a dominant position in the UK financial infrastructure space and is one of the biggest providers of financial data globally.

That said, it does face competition from rivals such as Bloomberg and FactSet in the financial data industry. So it will need to continue to innovate (its partnership with Microsoft should help here).

It’s worth paying for quality

In life, it’s often worth paying a bit extra for quality. And it’s no different in the stock market. As Buffett’s said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

So I never ignore a stock just because it has an above-average valuation. If it’s a great company the valuation could be justified, and it may still be able to generate great returns for investors.

LSEG’s a good example here. I started buying this stock in July last year when it had a P/E ratio in the mid-20s (versus the FTSE 100 average of 14). So it wasn’t a bargain.

However, since then it’s risen about 24%. That’s miles ahead of the return from the Footsie (about 13%). So it was worth paying up for this high-quality business.