American billionaire investor Warren Buffett has said for decades that he’s good at allocating capital. In other words, he’s skilled at investing money in ways that make it work hard for him.
More recently, Buffett’s been describing himself as a business picker. That choice looks like a response to today’s fast-paced stock markets. And it’s a challenge thrown out to those that talk about stock picking.
Adopting the right attitude
There’s a crucial difference between the mindset of investing in stocks and that of investing in businesses. Buffett’s focus on underlying enterprises has made him billions over decades and elevated him to the top in the world of investing.
Share prices move all over the place. And in today’s digital world the pace is faster than ever. We often see wild swings in stock prices measured in hours and days when 50 or 60 years ago, those moves would likely have taken longer to play out.
There’s both opportunity and threat in today’s volatile stock market.
Stock traders aim to exploit the action and movement. But Buffett focuses on being the part-owner of great businesses. And he uses the swings in prices to buy stocks when they offer a fair valuation for the underlying business.
Most of his investment activities take place within his listed company Berkshire Hathaway. In his letter to its shareholders in 2020 he described his approach to investing in his trademark simple terms. He aims to “own all or part of a diverse group of businesses with good economic characteristics and good managers”.
That’s it! That’s his one-sentence tip to improve stock market returns. And it’s the backbone of his investing philosophy. The only other thing he does is to buy those businesses at opportune times when the valuation is low enough to make sense of a long-term holding period.
Compounding earnings
He often talks about buying “wonderful” businesses at “fair” prices. And within Berkshire Hathaway, he’s said it makes no difference whether he owns businesses outright or partially owns them by holding some of their stock.
One good example is the way he bought shares in smartphone and electronic device maker Apple in 2016 when the valuation of the business looked undemanding.
He recognised the quality in the business and the fair-looking valuation at the time. Since then, the shares have multi-bagged for him, driven by the success of the enterprise.
Apple has been compounding its earnings over the past few years. And Buffett has been reaping the rewards in his stock portfolio from his long-term investment in the business.
Nothing is certain or guaranteed when it comes to owning stocks and shares. All businesses can face operational challenges at times. And it’s easy to lose money in the stock market because of that.
However, Buffett’s clarity of thinking and careful research has helped to give him an edge in the markets over many years.
For me, Buffett’s one-sentence tip is a guiding light to follow towards aiming for improved stock market returns.
