Warren Buffett has been called the greatest investor of all time. He’s also probably the wisest. The ‘Sage of Omaha’ doesn’t just understand stock markets, he understands people too. He knows the biggest obstacle to investment success is our own psychology.
Investors are their own worst enemies. They jump on crazy trends because everybody else is doing the same. Greed makes them buy at the top of the market. Fear persuades them to sell at the bottom. A refusal to admit mistakes leaves many holding onto underperforming stocks for years.
When buying UK shares, I’ve made all the above mistakes, and more. By listening to Warren Buffett, I’m hoping to keep my errors to a minimum. Here are five key lessons that have helped me combat my personal investment demons.
I’m learning from Warren Buffett
Buffett famously said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Basically, he’s trying to warn people against making snap ‘buy’ decisions, and chase get-rich-quick opportunities.
Today’s Reddit-fuelled trading frenzy must drive him crazy, as investors clamour to buy stocks such as AMC Entertainment Holdings and GameStop for all the wrong reasons. I only buy companies I believe have a great long-term future. That means at least 10 years, ideally decades.
I trampled all over my second Buffett piece of advice in my first year of investing. “An investor should act as though he had a lifetime decision card with just 20 punches on it.” I bought on a whim, then sold for the same reason and bought something else. Now I have learned to take my time over investing, and pick my stocks carefully.
I’m not alone in trashing Buffett’s third mantra. “Do not take yearly results too seriously. Instead, focus on four or five-year averages.” The entire market is guilty here, as companies’ share prices fly up and down, based on one set of quarterly results, let alone annual ones. All results do is point to the direction of travel. However, they’re not a destination in themselves.
I’m aiming to get rich slowly from UK shares
Here’s an interesting Buffett quote. “Success in investing doesn’t correlate with IQ… what you need is the temperament to control the urges that get other people into trouble in investing.”
I’ve never been tempted to find out my IQ (I hate disappointments), but I know my temperament is suspect. For example, I sold my stake in ARM Holdings because it hadn’t risen for three whole months. That rash move cost me a 10-bagger. I’m more patient now. Honest.
Meanwhile, this Buffet gem took me a long time to understand. “Buy into a company because you want to own it, not because you want the stock to go up.”
I get it now. I used to put the cart before the horse, and focus on getting rich. Now I focus on buying top UK shares first, and hope the rest follows.