Warren Buffett is well known for his investment prowess. Thanks to his annual shareholder letters and high media profile, anyone can benefit from his advice on investing in shares.
As an investor I have learnt a lot from Buffett. Here are four key lessons I use in my own investing.
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1. Take a long-term perspective
Buffett eschews short-term thinking. Instead of trying to eke out small profits trading, he looks to buy stakes in companies he expects to grow exponentially in the coming decades.
Sometimes I am attracted to companies that seem to have a bright future if only for the foreseeable future. But when I think about Buffett’s advice, I focus more on investment ideas I think might succeed for decades.
For example, Safestore is a self-storage provider. I expect demand for its services to grow for many years from now. I’d be happy to buy it now and hold it indefinitely. A growing industry can attract competition and drive down profit margins, though. So, like Buffett, I’d diversify my holdings to reduce my risk.
2. Read the accounts
During the global financial crisis, Warren Buffett was asked to consider bailing out the bank Lehman Brothers. He spoke to its boss on the phone. But apart from that, he spent most of the day in his Nebraska office reading the company’s annual report and accounts.
A lot of investors would think that for such a large possible investment, it would be necessary to speak to people across the banking industry. They’d want to get the latest information on the bank from people on the spot. Buffett didn’t. He realised that legal reporting requirements meant that if he scrutinised the company’s accounts closely, that could furnish him with much of the information necessary for his decision. He decided not to invest, and Lehman crashed within a year.
Annual reports contain a lot of flannel but they are also often valuable sources of information. For example, I think Renewi operates in a promising business field, but one close look at its accounts gave me concerns about its weak profitability.
3. Warren Buffett on greed
One of Warren Buffett’s most famous aphorisms is “Be fearful when others are greedy and greedy when others are fearful”.
Buffett sees other people’s greed as a warning sign of market overheating. That is why he is fearful. Lately there have been examples of greed in the market, from the Gamestop frenzy to the disappointing IPO of Deliveroo.
I also think there is a fair amount of greed from some investors in Argo Blockchain. Following Buffett’s advice, I am therefore fearful. While I see some merit in the Argo business and its management, I don’t plan to invest in its shares at their current price.
4. Warren Buffett is happy to wait
A striking theme of Warren Buffett’s investing across his lifetime has been his patience. He has said that if the stock market closed for years at a time, it wouldn’t bother him.
What interests me about this is that it only works because of Buffett’s investment philosophy. If he was a trader exploiting market swings his patience could be a liability. But it’s not, because Buffett is an investor not a trader. He is looking for quality companies to buy and hold, in some cases forever.