I’d use these steps from the Warren Buffett/Charlie Munger investing method today

Warren Buffett and Charlie Munger’s focus on industries they understand and their patient approach could be useful in today’s investing environment.

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Warren Buffett and Charlie Munger are two of the most successful and revered investors of all time. They’ve delivered market-beating returns on a consistent basis over a long period of time.

Although following their strategies may not guarantee high returns, it could have a positive impact on an investor’s portfolio in the long run.

As such, by focusing on industries that an investor understands, looking beyond short-term market movements and holding some cash, it may be possible to earn relatively attractive returns from equities.

Warren Buffett and Charlie Munger’s limited knowledge

Despite their track record of high returns, Buffett and Munger don’t invest in every industry available to them. In fact, many of their most successful investments over the years have been in the consumer goods and banking sectors. They’ve often overlooked technology businesses, as well as other sectors that many other investors have profited from.

The main reason for this is that Buffett and Munger prefer to focus their capital in sectors they fully understand and where they may have a competitive advantage versus other investors. This may reduce the risk of their investments, since they fully comprehend the potential threats that may be ahead.

Similarly, it may mean higher return potential. This is because they’re able to identify the most appealing investments in an industry at a given point in time.

Although following a similar approach means an investor may miss out on some attractive buying opportunities, the success of Buffett and Munger shows that investors don’t necessarily need to be experts in all industries to outperform the stock market.

Looking beyond short-term market movements

Warren Buffett and Charlie Munger also look beyond short-term market movements when investing. This allows them to avoid becoming too fearful in a market downturn. This enables them to buy stocks when other investors are selling them.

Equally, in a bull market they rarely become excited about a stock market rally. This helps them to avoid overpaying for shares when other investors are allowing their optimism to cloud their judgment.

By taking a long-term view, it’s possible to more easily capitalise on the stock market cycle. It shows that gains and losses for the market have never previously lasted in perpetuity. By understanding this cycle, and seeking to profit from it, it may be possible to earn higher returns in the long run.

Holding cash

Warren Buffett and Charlie Munger also hold relatively large amounts of cash at all times. They don’t rely on its returns, but rather use it to be able to respond quickly to short-term market movements that can create temporary buying opportunities. Holding some cash may also provide peace of mind during uncertain periods.

As the 2020 market crash showed, stock markets can recover quickly from their downturns. Through being in a position to react quickly, it may be easier to take advantage of short-term mispricings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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