Buffett, like many other great investors, tends to be very discriminating-he avoids the temptation of buying a stock that seems alluring at the moment. Any stock can potential be a value if the price is right, but Buffett doesn’t allow himself to be fooled into buying stocks just because they are undervalued.

Eventually, each of the 10,000 or so U.S.-list stocks, including the Qualcomms and Oracles of the world, will trade at undervalued price, but only a small fraction of the 10,000 companies offer compelling long-term growth prospects. Most have poor fundamentals or an erratic growth history and should be shunned. Many others will provide periodic trading gains and then languish when the investment community tires of their stock and seeks short-term profits elsewhere. As you hone your stock picking over time, you will eventually whittle down your short list of buy candidates to a few dozen. Then, you can zero in on this list and purchase them, one at a time, as their prices fall to favorable levels.

You should avoided the temptation of buying stocks simply because you have cash on hand, Buffett believes. More often than not, a havey wallet invites mistakes. At the beginning of 1999, Buffett was holding more than $35 billion in cash and bonds in Berkshire Hathaway’s investment portfolio. He was content to hold this great sum of money, which was equal to the total yearly output of dozens of smaller countries, indefinitely until he found suitably priced companies to purchase. In contrast, … Read more