Legendary investor Warren Buffett is known for sharing his investment advice freely. I have also learned a lot simply by studying his investment moves.
Here are four investment lessons from Buffett that I think have made me a better investor.
1. Warren Buffett’s focus on quality over timing
It’s easy to look at a share that has doubled in the space of a few months and wish one had bought it at the right time. With the benefit of hindsight, it can seem easy to benefit from sharp upward moves in a share price. However, as an investor I can only invest for the future, not the past.
Buffett doesn’t worry about trying to time the market precisely. Instead, he focusses on finding great quality companies at what he deems a fair price. So he doesn’t worry whether the share in question is already more expensive than it used to be. If a company is good enough, Buffett reasons, in the long term the share price will likely reflect that. Missing the bottom share price by 10%, 20%, or even 100% hurts less if the share still goes on to soar in value.
2. Don’t invest in anything you don’t understand
Buffett is a voracious reader and has a lifetime of investing experience. So I would say his breadth of knowledge is probably wider than that of many people. Yet he sticks to businesses in his “circle of competence”. If Buffett doesn’t understand what a business does and how it makes money, he won’t invest in it. That doesn’t mean he sees it as a bad investment opportunity. It is just that he feels unable to judge the opportunity and so passes on it.
It’s possible to grow one’s knowledge over time. After shunning tech stocks for decades, Buffett did eventually invest in IBM and Apple. But the principle remains: Buffett sticks to what he knows. I try to do the same. I have a broad understanding of how a supermarket like Sainsbury or a transport company like Go-Ahead operates. But the business model of a trading house like Man Group, by contrast, isn’t something I feel adequately knowledgeable to assess.
3. Invest to hold but be prepared to sell
Buffett famously says that his preferred holding time is forever. I think it makes sense to buy shares one could imagine holding for the foreseeable future. That suggests the company has strong prospects for years or decades ahead. Holding shares for a long period also reduces trading costs.
But while Buffett likes the idea of shares one holds for many years, he is also willing to sell. At the start of the pandemic, he swiftly dumped his airline shares even as prices plummeted. What I’ve learnt from Buffett is that as an investor, I ought not only to consider whether a share has attractive long-term prospects when I am thinking of buying it – but also once I own it.
4. Warren Buffett spreads his risks
Buffett never puts too many eggs in one basket. Indeed, while his Apple stake has been phenomenally rewarding, he has started to sell part of it. I think that may be because as a smart investor, Buffett always wants to manage his risk by holding a diversified portfolio. I follow his approach.
