Warren Buffett's advice that made me money

Here at The Motley Foolwe are big fans of Warren Buffett. When it comes to generating wealth through the stock market, he is in a league of his own (about 20% of annual returns since the mid-1960s).

Here, I'll highlight three quotes from Buffett that have made me money over the years. In my opinion, this is one of his best investment tips.

Investing made easy

Investing doesn't have to be difficult. And Buffett sums this up well when he says: “Your goal as an investor should be to buy, at a reasonable price, a share of interest in an easily understood business whose earnings will likely be materially high five, 10, and 20 years from now..”

As soon as I started following this advice, and focusing on companies with strong earnings growth, my returns became much better. Because, in the end, it is income growth that leads to share price growth over time.

So these days, one of the first things I look for in a company is long-term growth potential. I look for growth companies in industries that “for sure” to have a much higher income in the future.

One company I recently invested in is debt equity here London Stock Exchange Group (LSE: LSEG). It is a major provider of financial data (important to banks and investment managers) and I would be very surprised if its profits don't grow in the coming years.

Finding businesses with moats

In today's technology-driven world, we see a huge amount of innovation. So to reduce risk, Buffett tends to invest in businesses that cannot be easily disrupted or replicated.

These types of businesses are said to have extensive 'economic channels'. “The most important thing is to try to find a business that has a wide and long-lasting moat around it,” he says.

In recent years, most of my best investments have been in companies with wide margins (eg Microsoft). In contrast, most of my worst investments have been in companies with narrow margins (eg ASOS).

Going back to LSEG, I think it has a wide groove. After all, it has a dominant position in the UK's financial infrastructure and is one of the largest providers of financial data in the world.

That said, it faces competition from rivals like Bloomberg and FactSet in the financial data industry. So it will need to keep innovating (its partnership with Microsoft should help here).

It's worth paying for quality

In life, it's often worth paying less for quality. And it's no different in the stock market. As Buffett says: “It is much better to buy a good company at the right price than a good company at a good price.”

So I never ignore a stock just because it has an above average price. If it's a good company the valuation can be justified, and it can still generate great returns for investors.

LSEG is a good example here. I started buying this stock in July last year when it had a P/E ratio in the mid-20s (compared to the FTSE 100 average of 14). So it was not profitable.

However, since then it has risen about 24%. That's a few miles before the Footsie returns (about 13%). So you had to pay for this high-quality business.