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Investment Wisdom from Warren Buffett

10 lessons you can learn from the legendary financier

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    A great manager is as important as a great business

    Buffett has said that great businesses must be able to survive bad managers, because eventually they'll have to. When a company has a good manager, however, it can boost its long-term prospects considerably. A great leader may not only foster a strategic vision but also help a company achieve it. Buffett, 85, is a good example in his role as the head of Berkshire Hathaway. It's easy to come up with others, such as Bill Gates in his tenure at Microsoft, the late Steve Jobs at Apple and Jeff Bezos at Amazon. When you combine a great manager with a strong business model, you will often see exemplary long-term returns.

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    Hold plenty of cash for emergencies - and for opportunities

    If you've ever gotten into an unexpected financial jam, you know how useful a rainy-day fund can be. Making the transition from a career to retirement requires a big adjustment: Your cash needs to evolve as you grow older. Rather than relying on a regular paycheck, retirees have to count on Social Security and whatever cash their nest egg generates. Set up a larger emergency fund so you can better weather any financial tempests. And, as Buffett has, tap the fund as needed to take advantage of lucrative investment opportunities—when most other investors cannot. Be patient with your cash and you'll always be in a position to take action and invest at the best possible time.

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    Embrace the boring

    Boring companies don't make for interesting cocktail party stories. But what Buffett and other successful investors have found is that companies in less exciting industries often produce excellent long-term returns, which is the principal goal for retirement investors. Think diapers, soap and toilet paper: one Buffett holding, Procter & Gamble, has become a global consumer-products leader. Investors who put $1,000 into P&G stock in 1986 and reinvested their dividends would have more than $32,000 today. By being the best in their business, boring companies often provide better rewards to their shareholders than do high-flying upstarts.

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    Look for top-brand companies that can control prices

    Creating brand loyalty is one of the most effective ways for companies to build success, earning them both repeat business and word-of-mouth recommendations to new customers. Coca-Cola is a prime example of a Buffett holding with a strong brand. The value of Coca-Cola's identity made it the third most valuable global brand in 2015, according to Interbrand. Going well beyond its original carbonated cola, Coca-Cola has used its brand strength to broaden its reach into areas such as juice and bottled water. That reach equals shareholder value, because Coca-Cola consistently charges more than store-brand offerings, yet retains a loyal customer base. Investing in strong brands can give you outsize returns.

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    Minimize your mistakes, and learn from the ones you make

    No one likes to err, but even Buffett makes mistakes. One recent example was his investment in Tesco, a leading food retailer in the U.K. In 2013, Buffett had soured on the company's management and sold some shares at a profit. But when accounting problems surfaced and the company's market share fell, he cashed out with a loss of almost $450 million. The key to overcoming errors in your investing is to see exactly where you went wrong. Keep a record of your investing mistakes and you'll have a guide to make you a better investor. Share those lessons with children and grandchildren to help them build their own fortunes.

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    Stick with what you know

    The sheer size of the stock market intimidates many would-be investors. Yet Buffett has learned that you can be successful without becoming an expert in every part of the market. In the late 1990s, he refused to embrace the technology revolution, and he avoided buying shares of tech stocks during their huge bull market run. As a result, he largely avoided the worst of the tech bust that followed, from 2000 to 2002. If there are certain areas of the financial markets that you're more familiar with, it pays to focus your efforts on them and take advantage of any special insight you have.

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    AARP Offer: Protect your money, grow your nest egg

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    Increase your purchasing power over time

    Buffett favors investments that produce consistent income and steady growth. In 2011, Buffett used gold as an example of a non-income-producing asset, noting that the entire global gold supply could be melted into a 68-foot cube. At the time, gold had the same market value as the entire 400 million acres of cropland in the U.S., plus 16 Exxon Mobils. Buffett pointed out that the cropland produced $200 billion in crops every year, and Exxon Mobil had profits of more than $40 billion, making them more valuable than gold. Retirees in particular benefit from income-producing investments that can keep up with (or even beat!) inflation and sustain investors' purchasing power throughout their lives.

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    Never overpay

    No matter how successful a company is, a share price that's too expensive makes the stock a bad investment. At stratospheric prices, anything short of the best-case scenario for a company can leave long-term investors with losses. That's why you'll often see Buffett wait until an industry's prospects dim before investing. For instance, he has recently purchased shares in energy companies, as those stocks plunged following the decline in oil and natural gas prices. By making a watch list of interesting stocks and waiting for their evaluations to fall to more sustainable levels, you increase your returns potential. With age comes patience. That can be an investing advantage.

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    Buy and hold

    It's easier to make an excellent decision once than to do it over and over again. If you're right about when you first buy a stock but wrong about the subsequent sale, you'll lose money or leave profits on the table. If you sell early and then fail to buy back in at the right time, you'll potentially miss out on big gains. The buy-and-hold, long-term investor makes just one key decision: which stocks to buy. After that, the only thing long-term investors need is the discipline to keep the stock. Don't hold every stock forever. But this way you minimize the number of smart decisions you have to make, and that improves your overall odds of success in the long run.

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    Don't shy away from revolutionary investments

    Investors think primarily about profits, but the business world is full of visionaries looking to improve the world in some important way. The payoff potential, even for retirees, is that once customers realize the practical value of an innovative product, they won't accept anything less. For instance, while investing in General Electric in 2008, Buffett lauded GE as "the symbol of American business to the world." The industrial giant's new leadership role in the wind energy and turbine business has made it a pioneer in the renewable-energy industry, and advances in aerospace engine technology and medical imaging devices have also touched millions of lives. The result? Life-changing products for people across the globe. The spirit of innovation can produce strong investment returns under the right circumstances.

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You can read more about retirement planning at Fool.com where Dan Caplinger covers personal finance, Social Security, and stocks for The Motley Fool.

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