Famous investor Warren Buffett has become a billionaire due to his canny investments. But on a much more modest scale, I think I can apply some of his wisdom to my own plan. If I had £300 to invest right now, here is how I would do it following three lessons from the ‘Sage of Omaha’.
1. Sticking to what I know
Buffett does not invest in anything he does not understand – and I think the same makes sense for me. With limited funds to invest, my risk tolerance would be fairly low. Putting money into things I do not understand is not really investment, it is speculation. By contrast, Buffett takes care only to invest inside what he calls his “circle of competence”.
This includes areas like banking, insurance and consumer goods. That is why he owns shares including Bank of America and Citigroup. My own areas of understanding may well be different. But whatever they are, I would stick with them when looking for shares to buy.
2. Taking my time
Money burns a hole in some investors’ pockets, which can be a costly mistake. Just because I have £300 to invest does not mean that I need to put it work straight away. In fact, I could wait months or even years before deciding that I had found investments I thought looked good for me.
That may not sound exciting – but it is what Buffett does. He is in investing to improve his wealth, not for excitement. If I can find great investments soon, I could put my money to work. But if nothing is available right now looks attractive enough, I would simply wait until something comes along that does – even if that took a while.
3. Buffett buys and holds
Once I had spent £300 on shares, I would not keep buying and selling them. That is trading and I prefer to be an investor.
Some people worry that they miss out on profit opportunities if they are not regularly trading. But Buffett’s approach is not based on exploiting short-term share price movements. He is aiming to buy little bits of great businesses at what he sees as a good price. If his analysis of the business’s strengths turns out to be correct, over time, hopefully, its value will increase.
That is why Buffett is happy to buy shares and hold them for the long term. Indeed, he has said that if someone is unwilling to hold a share for 10 years, they should not buy it even for 10 minutes.
That sort of long-term investing suits me too. If I choose the right shares to buy, holding them for years could help improve my investment returns.
Following the approach
As a private investor with just a spare few hundred pounds to invest, would it make sense for me to follow the Buffett approach?
I think it would. The three investment principles above do not require large sums. They can also help me adopt a disciplined, strategic approach to investing that will hopefully develop my skills in case I have larger sums to invest in future.