Legendary investor Warren Buffett is well-known for being one of the most successful stock pickers in history. But some of his techniques in choosing shares to buy are surprising — surprisingly simple.
In fact, there’s one thing Warren Buffett does when choosing shares that I and most other investors can do easily, for free.
Reading research
Buffett is known as a voracious reader. He spends the majority of his working day reading, which gives him an informational advantage over many investors in the stock markets.
Back in 2011, he bought shares in IBM. That didn’t turn out to be one of his more successful holdings. But what interests me about the investment decision was how Buffett described the process of making it. In his 2011 shareholder letter, Buffett wrote, “I was late to the IBM party. I have been reading the company’s annual report for more than 50 years, but it wasn’t until a Saturday in March last year that my thinking crystallized. As Thoreau said, “It’s not what you look at that matters, it’s what you see.”
That’s right — Warren Buffett had been reading IBM’s annual report for over half a century. He hadn’t been buying its shares, he hadn’t had a position in the company, but still he had been ploughing through IBM reports. Here he was, on a weekend in his eightieth year, doing the same thing and finally what he saw led him to decide it was time to initiate a position in the company.
Understanding Warren Buffett’s investment logic
Why on earth would Buffett spend so much time across many decades reading the annual report of a company in which he wasn’t a shareholder?
I think there are probably multiple explanations for this, which help give an understanding of Buffett’s investment logic. First, he always suspected IBM might turn out to be a good investment at some point, so it merited further investigation. After all, it was one of the US’s leading companies. So he wanted to learn more about it.
Secondly, he desired to expand his circle of competence. Warren Buffett emphasises the importance of only investing inside one’s circle of competence. One way to expand one’s circle of competence is reading a company’s annual report in detail.
Thirdly, I think Buffett sees value in reading a lot of company annual reports to gain a broad understanding of how the economy is performing. In the UK, for example, companies such as Tesco, Unilever, Barclays, Greggs, and Go-Ahead could all give me some understanding of broader economic trends in their reporting. Even though I don’t own shares in them, I could still benefit from reading their reports.
Applying the Warren Buffett approach – for free
The great news is that I can follow Warren Buffett’s approach here for free. Most companies publish their annual reports online. Some will send out paper copies free of charge to investors who are considering buying their shares.
That is a treasure trove of information. Reading diverse information sources, learning more, and thinking hard about how to act on the information has been integral to Warren Buffett’s success as an investor. Fortunately, I can take the same approach without needing to spend a fortune.