Billionaire investor Warren Buffett has accrued so much wisdom during his long career so there are gems of advice on every level. But here are two specific Buffett lessons I would apply when looking for shares to buy for my portfolio.
Don’t own what you can’t understand
The great man is adamant that he only invests in businesses that fall inside his circle of competence. In other words, he will not invest in things he does not personally understand.
The reason for this is quite simple. Buffett thinks that it can be hard to assess the future prospects of many businesses. That helps explain why even he has bought some shares that have turned out to perform poorly.
If it is hard enough to assess the prospects of a business we understand well, but it may be near impossible to judge how an unfamiliar business we do not understand will perform in future. So investing in the shares of such a business could end up being closer to speculation than investing.
So I try to stick to my own circle of competence when investing, just like Buffett. But this is not fixed as my understanding of other businesses and sectors can expand. So, for example, I can always take time to learn more about another area I am interested in to invest.
Be patient
Buffett watches some shares for years, or even decades, before buying them. He had been reading the annual reports of IBM each year for half a century before adding the company to his holdings.
Why does Warren Buffett sometimes take so long before investing? I think he is waiting for a business to show particular promise, and also for its price to become attractive. No matter how good a business is, if the shares are expensive, an investor could still do badly buying them.
Often as investors we are faced with a sense of urgency. It is true that sometimes, amazing opportunities present themselves only for a short period of time. But, in general, many strong companies ought to do better over time. So while returns may vary depending on when I invest in such a business, there are lots of potentially lucrative opportunities to buy into great companies.
For example, if I had invested in Apple when it first came to the market, I would now have a massive profit. But if I had invested in it five years ago once Buffett had bought shares in the tech giant, I would still be showing a profit. Even if I had invested in it just a year ago, I would still be up on the deal.
Investment decisions are important. So like Buffett I think it make sense to take time.
Warren Buffett on doing less
In essence, these two Buffett approaches add up to sticking to what I know and taking my time. That reflects his wider investment philosophy. And that does not focus on how many decisions an investor makes but rather the quality of those decisions.
By doing less, but aiming for higher quality decisions hopefully, like Buffett, I can find the right investments for me.