Every February, investors look for wisdom in the annual shareholder letter of Berkshire Hathaway. Its chief executive, Warren Buffett, is a legendary investor famed for his stock market success. Investors can learn a lot by following Buffett.
I’ve been following his advice for my own portfolio in 2021. Here’s how.
Buy a part of a business, not shares
Buffett often talks about shares as buying a part in a business. Instead of focussing on short-term movements in share prices, he suggests shareholders imagine that the stock market was closed for a prolonged period of time. If they have bought into the right business, the inability to offload their shares for a while ought not to make any difference. They would still own part of a great business and would expect it to be worth more over time.
I adopted that mindset recently in buying shares in Unilever. The company’s shares have fallen lately so I felt there was a chance to get into a good business at an attractive price. With brands like Dove and Knorr in its stable, I expect the company to thrive for many years to come. If I didn’t look at the share price for years, I still expect Unilever products would be in regular use around the world.
That might not be the case, though. Post-pandemic demand for household cleaning products could fall, for example. That’s why, like Buffett, I diversify across different investments. That helps reduce the possible negative impact of any one investment on my overall investment performance.
Warren Buffett likes strong brands
A lot of businesses require heavy expenditure. For example, owning an estate of buildings or conducting medical research can be costly. Buffett does invest in some industries with high expenditure requirements, like railways. But he has often said that he likes well-established brands, that can generate pricing power for decades without necessarily needing much further investment.
That helps to explain why Buffett has held shares in Coca Cola for decades. The company’s brand portfolio is so strong that it should be able to generate profits for decades even with limited investment. After all, people still remember classic ads like the one based on “I’d Like to Teach the World to Sing” even though it was created half a century ago!
Buffett sticks to what he knows
One interesting thing about Buffett is how many great investment opportunities he has missed out on. That’s no idle mistake on his part. Buffett only buys into companies where he understands the market and the company. So he is willing to forego outstanding opportunities because he prefers to stick to his knitting.
That is true for industries – for example, Buffett is very comfortable in insurance but for many decades steered clear of tech. But it is also true of specific companies. Buffett sometimes decides to invest in a company by reading its annual report and accounts. If he doesn’t feel comfortable from that, he doesn’t invest.
That’s a very interesting insight for me, because it suggests that Warren Buffett’s legendary investments are made with the same sort of information I can find on the Internet. As long as I focus on areas I understand, and research companies properly, I could emulate Buffett’s approach of sticking to what one knows.
