Investor Warren Buffett enjoys a well-earned reputation among investors. That is not just because of his success at the helm of Berkshire Hathaway. It is also because Buffett communicates his investing wisdom publicly in simple nuggets that any investor can apply to their own situation.
Here are three lessons I’ve learned from Warren Buffett – and how I would apply them in putting £1,000 to work in UK shares.
1. Thinking like an owner
A consistent theme in Buffett’s investing career has been not seeing shares merely as financial instruments. Instead, he sees them as small slivers of ownership in the company.
That might sound semantic, but actually it reflects a different mindset. Looking at shares just as trading opportunities, for example, I might be more attracted to shares with strong momentum. That’s the sort of thinking that has made meme stocks like AMC attractive to some investors, in my view.
But thinking like an owner, my focus changes. I pay more attention to a company’s long-term prospects and likely profitability. Instead of focussing on short-term price movements, I consider the underlying characteristics of a business over decades.
Take Diageo as an example. I feel confident that the company’s broad portfolio of premium drinks brands could help it profit for decades to come. So I see long-term value regardless of the exact share price today. Indeed, Warren Buffet himself is a fan of branded drink manufacturers such as Coca-Cola.
As an owner with long-term considerations, naturally I’d also consider risks. For example, does the increase in small start-up distilleries threaten to eat into Diageo’s market share? Or is it an opportunity to help the drinks behemoth spot emerging trends faster?
2. Warren Buffett on simplicity
An interesting lesson from Buffett’s portfolio is that he prefers investing in companies with straightforward business models. From train companies to homeware retailers, Buffett chooses companies where success relies on basic business principles, not financial engineering.
That matters to me as an investor because financial engineering often helps a company boost its results at least for a while. So such firms may seem to be growing profits faster than, say, a supermarket chain like Tesco or transport operator such as Go-Ahead. But as Buffett’s approach reminds me, the more straightforward a business, the easier it is to assess its prospects. That can seem boring – but if it means not losing money in opaque, poorly run companies, I’m okay with being boring.
3. Buy as if to hold
Buffett is sometimes characterised as a ‘buy and hold’ investor. That’s not the whole picture: he sells shares too.
But I think a useful lesson from Warren Buffett is buying shares with the intention of holding them. He is an investor, not a speculator. As circumstances change, he may sell. But if I am thinking of buying a share and already planning when to sell it, perhaps I shouldn’t purchase it. I learnt that from Buffett.
As I feel Diageo offers long-term potential, I would consider putting £1,000 into it. If I didn’t have other shares, though, that wouldn’t offer me diversification to reduce my risk. In that case, I’d diversify by splitting the £1,000. I’d put half into Diageo and the rest into a passive tracker fund of the sort Buffett often talks about, for example, the Vanguard FTSE 100 index Unit Trust.