1 Warren Buffett tip that’s helped me become a better investor

Paul Summers reveals one tip from billionaire Warren Buffett that’s been incredibly useful in helping him become a better investor.

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Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

Following Warren Buffett’s advice, such as being “greedy when others are fearful“, has likely made many private investors very rich indeed. However, I think there’s one tip from the ‘Sage of Omaha’ that doesn’t get sufficient attention, despite being potentially just as useful as all the rest. 

Be “approximately right

As wealthy as Buffett is, his success has not been the product of perfectionism. Indeed, a quote from the master investor sums this up nicely.

Just 10 words have helped Buffett become a billionaire from scratch: “It is better to be approximately right than precisely wrong.

For any investor, this seems patently sensible advice. However, the simplicity of Buffett’s tip is something I failed to grasp in my formative years in the stock market. I wanted all my calls to be bang on.

As I’ve come to discover, this is simply impossible. Everyone gets things wrong. Even Buffett has made some awful decisions in his life on the markets, such as an ill-fated investment in FTSE 100 giant Tesco a few years ago

The myopic nature of the market is another problem. If a company fails to meet analyst expectations on earnings, even by only a small amount, its share price usually dips. This only really matters if someone is looking to move in and out of stocks. For long-term-focused Fools, it’s all pretty meaningless.

So how do I try to implement Buffett’s suggestion into my own investing?

Using Buffett’s advice

First, I make a point of separating myself from traders that pore over the next quarterly trading statement as if it were the most important thing. So long as a company explains how it is responding to headwinds (if any), a slight shortfall in the numbers doesn’t concern me.

Second, I don’t seek perfection from my portfolio. Instead, I try to ensure that I follow a few basic principles. These include owning a roughly optimal number of stocks, paying what looks to be a good price for shares and getting my risk profile approximately correct according to my age and financial goals.

It’s also not about demanding that my portfolio outperforms the market by a specific amount in a year or, indeed, every year.

Third, I try to select stocks based on a number of characteristics that have, over time, tended to generate excellent investment returns. High-profit margins, a dominant market share and minimal/no debt are examples.

This in no way guarantees me a solid result. That said, it should tilt the odds in my favour. It’s also a better bet than trying to time the market precisely. As a rough rule of thumb, great businesses stay great, even if performance varies from year to year. Poor companies stay poor or don’t survive long enough for us to notice.

Don’t sweat it

Sure, it’s easy to stress the importance of being approximately right when you have already billions in the bank like Buffett. However, I firmly believe that taking his advice to heart has stopped me from a lot of unnecessary rumination in recent years. It’s also come in handy during the last few days of market volatility. 

Real wealth is made by knowing what really matters. Buffett’s tip reminds me not to sweat the small stuff.

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 considered so you should consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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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