The investor Warren Buffett has had a spectacularly successful career buying shares. In fact he is a billionaire many times over — and much of that is down to his strategy when it comes to choosing shares to own.
But the Buffett approach is hardly a secret. In fact he publicises a lot of his thinking, meaning a small private investor like me can apply some of the same principles when choosing shares for my own portfolio.
Here are seven Buffett habits I hope can improve my own investment returns.
1. Do the research
Buffett lives far from Wall Street. He spends most of his working day sitting alone in his office reading. In fact he often reads hundreds of pages a day, including company reports.
Doing a lot of research means Buffett is well educated and well informed. That has been critical to his success – and is something I also can do.
2. Circle of competence
The Sage of Omaha emphasises the value of sticking to one’s circle of competence. He invests only in businesses he understands and can assess.
Applying the same discipline should help me avoid making terrible investment decisions by putting money into a business when I cannot judge its prospects.
3. Look at the business model
Buffett likes profits. But he does not just focus on whether a company looks profitable. He asks the question I think any investor ought to have in their mind: does a business have a model that should enable it to be profitable in future?
For example, Buffett owns shares in companies like Coca-Cola and American Express because those companies have unique brands and assets in markets that look set to experience high customer demand over the long term. They therefore have business models that will hopefully enable future profits.
4. Keeps things simple
Buffett tends to stick to companies with fairly simple business models. He also does not invest in businesses he thinks have overly complicated accounting methodologies he cannot understand.
That means he keeps things simple.
Rather than trying to outsmart other investors, Buffett is happy to take an uncomplicated but proven approach to investment. He tries to buy stakes in great companies when they cost much less than he thinks they are worth.
5. Diversification
Even Warren Buffett makes mistakes, though. Indeed, last month he told shareholders in his company, “over the years, I have made many mistakes”.
But Buffett always keeps his portfolio diversified across a number of shares, to limit the overall impact on his portfolio of any one mistake. I do the same.
6. Being patient
Buffett has said he would not mind if the stock market closed for years at a time.
Does that sound odd? I think Buffett’s point is that he buys stakes in what he sees as outstanding businesses and plans to hold them for the long term.
Such shares may not often trade at an attractive price – but Buffett has the patience to wait for years before investing.
7. Staying calm
Some investors are frantic, others get very stressed.
And Buffett? He has said, “I will not trade even a night’s sleep for the chance of extra profits”.
I think that is a helpful approach for me to adopt as a private investor too, especially in today’s turbulent markets.
