Studying the techniques of billionaire investor Warren Buffett often throws up new insights. We can hear something perhaps 10 times before the 11th delivers the penny-drop moment. And it’s in that spirit that I’m posting the five top Buffett tips that I’d follow and aim to retire rich.
1. Invest in smaller companies
Buffett is known for investing billions into companies with large market capitalisations. But that’s now. And its because his investment company Berkshire Hathaway is so large. If he’s to move the dial from his winners he needs to find a stock that can take some of his billions. And that means investing in smaller businesses would be almost pointless as well as being difficult to execute.
But it wasn’t always that way. Buffett made his first few millions targeting smaller businesses. And that’s because growth can be at its most vibrant in smaller, younger, nimble enterprises. Another way of thinking about it is he invests in elephants now but he used to invest in mosquitoes. And when he did, his annual gains were larger than the 20% or so he achieves today.
2. Focus
Every day we are bombarded with news, forecasts, opinions and stock-chatter. But one of the keys to Buffett’s success is his ability to focus on just one investment opportunity at a time. And that means he ignores most of the other market ‘noise’.
On top of that, Buffett said during Berkshire Hathaway’s 1994 annual meeting that investors shouldn’t trust forecasts or projections. Instead, he said it’s wise to form some idea about the future of a potential investee business without listening to so-called experts.
3. Research
And that leads to tip three. Buffett does his own research — lots of it. Before investing in any stock, he makes sure he knows how the underlying business makes its money and its realistic prospects for growth.
4. Margin of Safety
Buffett looks for good value before buying any stock. He got the idea of looking for a margin of safety from his mentor Benjamin Graham. And it means buying stocks when they assign a value to a business that is below its intrinsic worth.
But what is intrinsic worth? The answer to that isn’t completely scientific. Investing is as much art as science. But Buffett once said growth and value are joined at the hip. So any assessment of what a stock is truly worth must include its prospects for growth. And that’s where thorough research and forming an opinion comes in.
5. Concentrate
Buffett thinks that extreme diversification is right for most investors, meaning he thinks we should invest in tracker funds. But for those willing to put in the work, he thinks diversification makes little sense. So after doing his own thorough research, he invests most of his funds in just a handful of stocks.
However, that strategy comes with risks. Concentration in just a few stocks is good when they work out, but bad when they don’t! And it’s worth me remembering that all shares carry risks as well as positive potential — even when I try to copy Buffett’s style.