Warren Buffett faces a problem that many of us would love to have. He has billions to invest. When you’re managing an investment company the size of Berkshire Hathaway, your investment choices are very limited. A few thousand in a small-cap company is very unlikely to make any real difference.
We small investors enjoy an advantage here. We can apply the same approach to a far wider range of investments. Here are three ways I’ve improved my investing approach by listening to Warren Buffett.
Balance sheet
I started out looking for the upside of potential investments. A growth stock starting to take off, and a decent chance of big profits? I’d go for it. Sometimes I did well, but sometimes I went spectacularly wrong.
Almost all the bad choices I made had one thing in common. The company was financially overstretched. It had big debts, was reliant on repeated new equity issues, or both. A brilliant new technology, or market idea, won’t help if you can’t survive long enough to hit the big time. Warren Buffett avoids debt-laden companies. And we saw how wise that was during the pandemic crash.
These days, I look for two key things in my investments. I want to see low debt, and healthy cash flow. I don’t have an absolute prohibition on debt, as long as it’s modest and can be easily serviced. It’s partly why I own shares in Unilever and Persimmon, but I won’t buy International Consolidated Airlines.
Listen and learn
Do I really follow Warren Buffett’s lessons every day? Well, spending every day thinking about our investments is surely unhealthy, isn’t it?
But every day I read, and I watch and listen, just like the master. News, current affairs, and all manner of my daily inputs can be relevant to companies I own or might own. I hear about popular brands, and mentally note who makes them. I’ll see who sponsors sporting teams, and again tuck the knowledge away.
And more directly, I get alerts whenever any of my companies release news. My stockbroker sends me news updates too. I make a point of reading all the updates from all of my companies. Oh, and not least, I read what my fellow Motley Fool writers say too. Opinions that I know are based on their personal investment research are very valuable.
Warren Buffett understands
I always try to invest in companies I understand. Is that an impossible hurdle? For example, how many private investors understand all the fine details of the banking business? Not me, but I still own Lloyds Banking Group shares. The key to me is understanding the basics of a business. I know, generally, what banks do and how they work.
There are technology stocks out there that I don’t understand. Warren Buffett doesn’t buy them, and neither do I. And I don’t invest in oil exploration companies, because I don’t possess the technical knowledge to understand their drilling results.
There’s a happy long-term outcome from this too. The more I’ve listened and learned over the years, the more companies I’ve come to understand well enough to invest in.
