Warren Buffett is rightly considered to be the most successful stock picker in the world. Ordinary investors can learn a lot by emulating his world view. Here are two ways in which you can be like the Oracle of Omaha.
Shares mean part ownership of a business
Buffett has always subscribed to this view, and has consistently taught others to follow suit. It’s sometimes easy to forget that stocks are not just pieces of (digital) paper that go up and down in price, they represent fractional interests in real businesses. And even though as an individual investor you are unlikely to ever accumulate enough of a stake in a multi-billion pound company to meaningfully influence the running of that firm, thinking of yourself as a part-owner is helpful for a number of reasons.
Firstly, it makes you concentrate on what you would naturally think about if you were buying part ownership of a private business — who the competition is, what effect will price changes have on sales, how changes in market conditions affect revenue and so on. Financial statements can be boring to read through, but it becomes a lot easier to decipher the numbers when it’s your company.
Secondly, it naturally incentivises you to take a longer-term view on the business. And thirdly, treating your stock investments like ownership in a real business can be a source of psychological comfort that allows you to hold your stock through the inevitable down periods that accompany any long-term investment.
Know when to bet big
Buffett once said: “If you were given a punch card with 20 ticks on it when you graduated, and those were the only investment decisions you could make throughout your entire career, how would you use them? You would likely be very selective, and probably very rich. This type of mentality will force you to be patient.”
Investing is very easy nowadays, or at least the mechanics of investing are easy. Almost anyone can open a trading account online within minutes and buy and sell stocks at will. While this increased convenience is certainly a welcome development, it has also made it easier for investors to make knee-jerk decisions with their portfolios. But if you mentally limit yourself to only making a small number of trades a year, you will think much more deeply about each individual one.
The flip side of this advice is that your portfolio will be less diversified than is commonly thought wise. Although diversification is an important part of investing, it is important to not go overboard. If you own stocks of 300 different companies, how well will you know any individual one? Probably not very well. By increasing the amount of time and effort that you put into analysing your picks, you increase the probability of any given one being a big winner. And if you are sure that you have a winner on your hands, it makes sense to bet big.
