Legendary investor Warren Buffett has made billions of dollars investing in the stock market. But while he has a lot of money at his disposal, many investors have just a few hundred pounds to put to work.
I reckon some of Buffett’s moves make as much (or even more) sense for me as a small private investor as they do for him.
Here are five of them.
Stay focused
Buffett has enough money that he could invest in hundreds of different shares.
But he does not.
Why? I think there are a couple of reasons. One is that he sticks to his circle of competence. Investing in what one understands makes it easier to assess a business and whether its share price offers good value.
Another reason is that Buffett knows superior returns come from investing in a small group of great shares, not a wider pool of merely mediocre ones.
Be realistic
Buffett has done very well. But that has come from sustained success year after year, not one big incredible move.
Looking at the companies in which he invests, one finds household names including Apple and Coca-Cola.
The Warren Buffett approach to investment involves being realistic about likely returns and managing risk, not investing in tiny unknown companies hoping their share price suddenly doubles or triples.
Cut losses
Even he makes mistakes, though.
Some have been very costly – and Buffett thinks some were made worse by his ‘thumb-sucking’. That was the phrase he used to describe his slow approach when selling a stake in Tesco in 2014.
When he realises he has made a mistake, he has proven himself willing to sell, even at a loss. Hope alone is not an investing strategy, after all.
Diversified portfolio
Although he has a focused approach to investing, one can have too much of a good thing. He liked textile manufacturer Berkshire Hathaway so much he bought the whole company. But while its name survives, the original business does not. It now houses his wider investments.
By spreading his investments across a range of industries and companies, Buffett benefits from the risk management principle of diversification.
As a small investor, I would say that that is perhaps even more important for me than it is for a billionaire like Buffett.
With limited funds, it can be tempting simply to put all the money into one apparently great idea. But even the best companies can run into unexpected difficulties. Like Buffett, I always diversify.
Long-term mindset
Warren Buffett has been investing for many decades.
That has helped him take a long-term approach to investing. Buying into a great company when its shares sell at an attractive price, then holding for the long term can be a lucrative yet passive way to build wealth.
That has worked for him. I also think it could help a small investor like me.
