The legendary investor Warren Buffett is well past retirement age but shows few signs of slowing down. I am applying some of his investing wisdom to my own retirement portfolio, hoping that can help me grow it faster. That would enable me to retire early.
Stick to what I understand
A baffling thing about investing is that people invest in businesses about which they could not even hold a one minute discussion in the pub. Rather than making the most of what they do understand and investing on that basis, they actively ignore it and basically become speculators not investors.
The point here is not what you do understand, whether it is supermarkets or artificial intelligence. The point, in Buffett’s view, is to make sure to stick to it. He emphasises the importance for investors of staying inside their “circle of competence”. Each investor’s circle of competence is different. Buffett, for example, clearly feels most at home in insurance, financial services, manufacturing, utilities, transportation, retail, and consumer goods. So he focusses his investments in those areas. If sticking to what I know and can assess helps me avoid just one bad investment, it could already help me hit my retirement targets sooner.
Go for great not just good
There are lots of good companies in which I could invest and hope to do well over time. But there are far fewer great ones.
Over the course of a year or two, the difference may not be obvious. But over the very long term – for example in the decades leading up to retirement – the difference can be huge. That is because a great company has the ability to make returns far above the average. Over the course of time, such returns compound.
Many investors comment on how rarely Buffett himself makes a big move in the stock market, despite having a huge cash pile on hand. His recently announced purchase of a stake in HP was noteworthy for exactly this reason. But Buffett’s approach is not to act for the sake of it. He is not interested simply in investing in good companies. Instead, he waits for what he sees as a great opportunity.
Do fewer things, on a bigger scale
A quick glance at his portfolio confirms that his actions match his words here. The recent HP purchase was for $4.2bn. Buffett has spent over $14bn on Bank of America and well over $30bn buying shares of Apple.
So, given that Buffett reckons great opportunities are rare, what does he do when he comes across one? Put simply, he goes in in a big way. As he puts it: “opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”. In other words, when Buffett sees an investment he likes, he tries to increase his potential reward by putting a sizeable amount of money into it.
No matter how well I invest, I am never going to have sums like Buffett to invest. But I think that the principle still applies: if I spot what I think is a really great opportunity, I ought to invest at scale. It is still important to keep my portfolio diversified, so that it never depends too heavily on the performance of a single share. But rather than spreading my funds thinly across many dozens of good shares, I would prefer to invest on a bigger scale in a dozen or less great opportunities.
Warren Buffett admits his mistakes
One reason some people do not hit their retirement target early is because of mistakes. It is not just because they make mistakes – even the most talented investors do that. Rather, it is about how they respond to mistakes. Instead of acting decisively as soon as they realise they have made a mistake, they dither. Sometimes, they make things worse by treating a falling share price as a buying opportunity even when the investment case that attracted them to a share is clearly holed below the waterline.
It is not easy to admit mistakes. It requires humility and a willingness to admit one’s errors. Many investors become emotionally attached to certain shares and can no longer assess them rationally, even as the bad news mounts. They think maybe the bad news is temporary, or a company’s past success means that it will be successful again in future.
But when Buffett spots a big mistake he has made – which by his own admission, sometimes takes him longer than it should – he acts decisively.
An example was his reaction to tumbling airline shares at the start of the pandemic. Others saw a buying opportunity, but the Sage of Omaha sold all of his airline shares. He was not trying to predict what might happen next for airline demand. Instead, he was recognising that a core assumption in his investment case for airlines had changed. Therefore it was time to sell, even at a loss. Avoiding bigger losses down the line when I already have enough red flags to alert me to the possibility they will arrive is one way I can improve my investment returns. That alone could help me bring my retirement forward.
Think in decades not minutes
Buffett is totally focussed on the long term. That does not mean that he does not look at what is happening here and now. He spends most of the day reading and devours multiple newspapers a day. But in the short term, his interest is only in whether market conditions make a business he already likes good value.
In deciding value, Buffett looks not only at price but also at a company’s long-term prospects. He is not swayed by a good quarterly earnings report. Instead, the focus is on whether a company has the economic characteristics that can help it do well through thick and thin. Applying a similar long-term mindset when choosing shares for my own portfolio can help me avoid costly fads. Instead, I can buy small slices of long-term success stories.
