Investor Warren Buffett has been active in the stock market for many decades. During that time he has experienced huge booms and dramatic crashes. While his results from year to year vary, as a long-term investor myself, I am impressed at his total return over the decades.
That is why I try to apply the Buffett mindset to my own investing, even if it is only on a very small scale. Here is how I do it.
Keeping perspective
Buffett has said that he does not make any investment that costs him even a single night’s sleep. That may not sound surprising, but I know people with far, far smaller portfolios than him who certainly lose a lot of sleep worrying about what happens in the stock market.
Partly I think this is about keeping perspective. Investing is only part of one’s life, so if it reaches a point where worrying about it overshadows everything else, then perhaps it is time to reassess one’s investment strategy.
But I think Buffett’s comment also reveals a deeper truth about his approach. Worrying about every twist and turn of the stock market is what people do when they are buying shares with an eye on short-term price movements. Warren Buffett is not in that mould. Rather, he tries to identify businesses he thinks have excellent long-term profit opportunities. Then he buys a slice of them, in the form of shares.
As he is in no rush to sell – he has said his preferred holding time is “forever” – even dramatic shifts in the share price do not bother him. Since he is investing based on what he expects a business to achieve over the course of many years, the Sage of Omaha expects that in the end a company’s share price should do well if the company itself is a strong business performer. That is why Buffett says that in the short term, the market is a voting machine, but in the long term it is a weighing machine.
Ignoring the noise
A key part of the Warren Buffett mindset when investing is focusing on his own approach, rather than being swayed by what other market participants say and do.
At a practical level, that means Buffett invests on his own terms even if doing so is unfashionable or against the popular mood of the day. At various points in his career, this has brought him in for a lot of criticism. The dotcom boom is one example. Buffett reckoned the market looked overvalued and also felt that many of the popular stocks of the day fell outside his circle of competence.
When the market was soaring and Buffett did nothing, more and more commentators asked whether he had lost his touch. But once prices crashed back to earth, it became clear that he had done better sticking to his proven investment strategy rather than following the crowd.
As an investor, the noise of the crowd can sometimes be so loud it seems very difficult to ignore it completely. But that is exactly what Warren Buffett has done – and his investment results speak for themselves.
Staying honest with myself
Investors all make mistakes. One of the things I think separates very successful investors from others is how they react to such errors. I feel Buffett is a case in point.
One element of this is being willing to admit to such errors. From his ill-timed investment in Tesco to the original purchase of Berkshire Hathaway as a textile manufacturing business, Buffett has made some colossal errors that have cost many millions of dollars. But he has been honest with himself about them. I think that is an important lesson for me as an investor too.
When I make a bad decision or circumstances change, having the humility and self-awareness to admit to my own investing mistakes may cost me. But not doing so could end up being more costly down the line. As Buffett says, there is rarely only one cockroach in the kitchen.
Another element of his approach to mistakes that I think can improve my own investing performance is that he learns from his mistakes. Like all of us, he does not always heed the lesson perfectly. For example, he had previously sworn off airline shares only to be tempted once more and to suffer again when the pandemic hurt such companies. But overall, his approach to mistakes is that he learns from them, remembers what he has learnt and moves on. As an investor, that can be difficult to do. A mistake can be tough. But Buffett still treats it as a learning experience.
Focusing on businesses I understand
A final aspect of his investment mindset I find interesting is not what he does – but what he avoids doing.
Despite a strong track record, deep research and a very developed understanding of how business works, Buffett avoids investing in huge swathes of the stock market altogether. That is because he is laser-focused on his own circle of competence. He only invests in businesses he thinks he understands. Why? He reckons that such an approach makes it easier for him to assess the prospect of a business doing well in future.
It is such a simple approach in theory, yet in practice I think a lot of investors ignore it. Instead they invest in hot new areas they do not understand, or industries to which they have had no personal exposure. Instead, I am following Buffett and focusing squarely on companies I feel I understand.
