Legendary investor Warren Buffett has accumulated decades of wisdom from investing in stock markets. That is helpful to him but also to many less experienced investors, as Buffett shares a lot of his thinking publicly.
Here are five ways I will be following Buffett’s approach when it comes to my own portfolio this year.
1. Stick to what I know
Buffett is emphatic that as an investor he tries to stick to industries that he understands well. That means he misses a lot of good opportunities. But he is alright with that, as he reckons that if he does not understand an industry, he is unable to assess whether a given company has any competitive advantage that could help it sustain future profits.
2. Focus on competitive advantage
Warren Buffett’s term for such an advantage is a “moat”. Like a medieval castle, he reckons a business moat can help protect what sits inside it from outside attack. That can help support profits in the long run.
I find that helpful as it can be easy to mistake a company that is well-managed for one with a strong competitive advantage. Over time, a company’s management changes. But the enduring nature of a structural advantage like proprietary technology or an iconic brand can help a company make profits for decades. Buffett’s investment in Coca-Cola is an illustration of that.
3. Investment not trading
Buffett likes to buy shares and hold them for decades. That does not mean he never sells. Sometimes his view on a holding changes and he cashes in his position. But if a company has the financial appeal he thinks it does, he is happy to keep holding it and benefitting from its future cash flows.
Instead of jumping in and out of shares based on small share price movements, Buffett tries to identify great companies in which he can invest for the long term. I think that sort of long-term viewpoint can also help me sharpen my investment focus.
4. Warren Buffett on diversification
Some of those companies Buffett has sold looked good to him when he bought them but stumbled unexpectedly. For example, he sold his position in Tesco at a loss in 2014 after an accounting scandal was revealed (which has long since been resolved).
That demonstrates the benefit of never putting all of one’s eggs in one basket, no matter how compelling the investment case may be. Buffett’s approach to diversifying his holdings across multiple companies and business sectors helps to reduce his risk if one of them performs badly. That is a valuable lesson I think can be usefully applied to my own portfolio no matter how small it is.
5. The value of patience
Warren Buffett does not make trades just because he has money to invest. He is willing to sit on tens of billions of pounds, for years at a time if necessary, rather than invest it in shares that do not meet his criteria. That takes patience and willpower, but over a span of many years it can lead to dramatically better returns. It allows Buffett to make the most of sudden market downturns in a way he could not if he had already invested all his funds.