Warren Buffett has doubled the stock market average return over the course of his career, generating annualised gains of 19.8% since 1965. There are a lot of factors that can be attributed to his multi-billion-dollar success. But at the heart of his investing strategy is the simple buying and holding of high-quality businesses at cheap prices.
Of course, this is far easier said than done. Many investors, including professionals, have tried to replicate his returns, most falling short. But while matching near-20% returns is a challenging task, employing Buffett’s tips and tricks can still potentially boost a portfolio’s performance. And in the long run, even an extra 1% can compound into significant wealth.
Tip #1: Capitalise on volatility
With the economy suffering monetary and political wobbles, it’s not surprising that stocks have been quite volatile of late. But as unpleasant as this can be to experience, these periods of heightened pessimism have historically presented some of the best times to buy stocks.
This is particularly true when it comes to growth-oriented businesses since these typically get hit the hardest by panicking investors. As such, explosive growth opportunities can end up selling at absurdly cheap prices.
And we’ve already seen some companies in the technology and e-commerce space start surging by double-digits this earnings season as positivity starts to creep back in.
One of Buffett’s top tips during both volatile and calm markets is to “be fearful when others are greedy, and greedy when others are fearful”. In other words, if everyone is busy selling, then that might be the perfect time to start buying.
Tip #2: Keep it simple
Every investor has their knowledge limits. Learning how to analyse companies, in general, is easy to pick up from reading expert books. However, some industries can be immensely complicated and require a specific analytical approach that can be challenging to learn.
Buffett is well aware of his limitations and strictly sticks to investing in businesses that operate within his circle of competence. Put simply, he never invests in businesses he doesn’t understand, regardless of how well they may be performing.
Personally, I learned the hard way that I know nothing when it comes to the fashion industry. Each of my past investments in this space turned into disasters. Therefore, I simply don’t invest in this sector anymore. Instead, I’m allocating my precious time to other opportunities I understand far better.
Tip #3: Focus on the long term
At the end of the day, investors aren’t buying tickers. They’re buying companies. And that’s the mentality Buffett takes with each of his investments. There are thousands of publicly-traded corporations for investors to choose from. Yet, only a tiny slice of these will go on to become market-beating investments.
By staying focused on the long-term potential of a company and verifying it has the know-how, competitive edge, and financial resources to get there, the odds of success can be drastically improved. At least, that’s what I think.