Starting to invest for the first time can be confusing. There is a lot to learn about the stock market and how it works. One way I do that is by seeing what lessons I might be able to learn from the approach of successful investors, such as Warren Buffett.
Buffett is a font of investing wisdom, much of it freely dispensed in the pages of his annual letter to shareholders in his company Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B).
Here are three ideas that have helped drive Buffett’s long-term success and I hope can also assist me as I try to build wealth in the stock market.
1. Thinking – and investing – for the long term
When I mentioned long-term success there, it reflected the approach Warren Buffett takes to investing.
He does not think in terms of days, weeks, months, or sometimes even years. Many of Berkshire’s investments date back decades. Indeed, he has said that his preferred holding time is “forever”.
If I can buy into a great business at an attractive price, over time hopefully its commercial success can go from strength to strength. That could be good for my portfolio valuation.
2. Avoiding red flags
Some investors live by the maxim, “no risk, no reward”. It is true that all shares carry some risk. However, some have more or bigger red flags than others.
In the past, Buffett has explicitly referred to Berkshire steering clear of shares that have certain red flags, no matter how appealing the businesses might seem.
Even then, he still makes mistakes. Indeed, one risk I see in owning Berkshire shares is that some problem over which it has no control will hurt the value of a company stake it owns.
An example of such a red flag could be a deceptive accounting practice, conflict of interest between management and shareholders, or an opaque corporate structure. Such things may be perfectly legal.
More risk does not necessarily equal more reward. In some cases, it equals zero reward – or a big loss. Smart investors like Buffett learn how to manage their emotions. They are willing to walk away even from potentially amazing businesses when they are not happy with the risks involved.
3. Keeping things simple
Buffett’s list of Berkshire shareholdings often reads a list of industries that have been around for centuries, from banks to insurance underwriters.
Some new investors believe that making money in the stock market is about identifying small companies most people have not heard of that have great growth prospects. In some cases, that can be very lucrative.
Indeed, investing in Berkshire when Buffett took over what was then a regional clothes maker in 1970 would have turned out to be a tremendous investment. But Buffett himself mostly invests in large, proven, well-known companies with fairly simple business models he understands.
Keeping things simple – and sticking to what I know – could hopefully make it easier for me to find some great shares to buy for my own portfolio.
