One of the successful investors whose wisdom I apply when choosing shares for my own portfolio is Warren Buffett. Best known for running Berkshire Hathaway, Buffett managed an investment partnership for many years before that. So he has honed his share picking skills across a long and varied career.
Here are three of his investment techniques I use when buying shares for my own portfolio.
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Think about a company not a share
The way Buffett thinks about shares is that they give him a chance to own a slice of a company. So he does not simply buy a share because it is cheap. Instead, he first assesses whether a company is one he would like to own as a whole if he could. Then, he looks at whether buying shares in it could offer him a way to own part of it at an attractive price.
That might sound obvious. But actually I think many investors do the opposite. Tempted by a high yield or a dramatic share price fall, some people buy stocks in companies they do not think are well run. One example of making this mistake myself was my purchase of Centrica. The shares looked cheap to me and the company had a good dividend history. But would I have bought a whole company involved in gas distribution and nuclear power at a time when the regulatory future for both activities was uncertain? I would not. Yet I bought Centrica shares.
Buy with no plan to sell
Buffett has said: “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
That is a very clear investing philosophy. Buffett is buying for the long term with a plan to hold, not sell. He is not timing market dips. Buffett is not a trader, he is an investor. But a lot of investors would be happy to buy shares and sell them in less than a decade. So, why does Buffett think his way?
I think it is about what he is fundamentally looking for when buying shares. Buffett tries to identify businesses whose sustainable competitive advantages can allow them to generate profits for decades to come. Such companies can be rare. But if an investor finds one, buying its shares can mean huge rewards over the long term. It also reduces the need to buy and sell, with all the trading costs and work involved.
From day-trading to meme stocks, Buffett would not be interested. He is a long-term investor looking for great businesses with strong growth prospects.
Warren Buffett diversifies
The billionaire investor has made some incredible stock picks in his time. So, why did he not just go all in on them?
Take Apple as an example. Buffett made well over $100bn in paper profit in Apple shares in under five years. Yet he had tens of billions of dollars of spare cash he did not invest. Why did he not use it to buy more Apple shares?
The answer is risk management. He has operated in the stock markets long enough to know that even the greatest companies can encounter unexpected difficulties. Buffett sometimes talks about being greedy — but he is never so greedy that he fails to diversify his holdings.