Right here at The Motley Idiot, we’re large followers of Warren Buffett. With regards to producing wealth from the inventory market, he’s just about in a league of his personal (near-20% annual returns because the mid-Sixties).

Right here, I’m going to spotlight three quotes from Buffett which have made me cash through the years. In my opinion, that is a few of his greatest investing recommendation ever.

Investing made easy

Investing doesn’t must be sophisticated. And Buffett summed this up effectively when he mentioned:“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 quickly as I began to comply with this recommendation, and deal with firms with sturdy earnings progress, my returns improved dramatically. As a result of, finally, it’s earnings progress that results in share price progress in the long term.

So today, one of many first issues I search for in an organization is long-term progress potential. I’m searching for firms in progress industries which can be “virtually certain” to have a lot greater earnings sooner or later.

One firm I’ve been investing in not too long ago that matches the invoice right here is London Inventory Trade Group (LSE: LSEG). It’s a significant supplier of economic information (important for banks and funding managers) and I’d be very shocked if its earnings don’t develop within the years forward.

Discovering companies with moats

In as we speak’s tech-driven world, we’re seeing an enormous quantity of innovation. So to scale back danger, Buffett tends to put money into companies that may’t be simply disrupted or replicated.

These varieties of companies are mentioned to have large ‘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 times, lots of my greatest investments have been firms with large moats (eg Microsoft). Against this, lots of my worst investments have been firms with tiny moats (eg ASOS).

Going again to LSEG, I believe it has a large moat. In any case, it has a dominant place within the UK monetary infrastructure house and is likely one of the greatest suppliers of economic information globally.

That mentioned, it does face competitors from rivals similar to Bloomberg and FactSet within the monetary information trade. So it might want to proceed to innovate (its partnership with Microsoft ought to assist right here).

It’s price paying for high quality

In life, it’s usually price paying a bit additional for high quality. And it’s no totally different within the inventory market. As Buffett’s mentioned: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

So I by no means ignore a inventory simply because it has an above-average valuation. If it’s a fantastic firm the valuation could possibly be justified, and it might nonetheless be capable of generate nice returns for buyers.

LSEG’s a superb instance right here. I began shopping for this inventory in July final yr when it had a P/E ratio within the mid-20s (versus the FTSE 100 common of 14). So it wasn’t a cut price.

Nevertheless, since then it’s risen about 24%. That’s miles forward of the return from the Footsie (about 13%). So it was price paying up for this high-quality enterprise.