Learning from a proven master can be rewarding when it comes to stock market investing. Billionaire Warren Buffett is open when it comes to sharing many of the techniques he has used over decades to build wealth.
Here are a handful I think could help me as I aim to build wealth in the stock market.
Stick to your knitting
Buffett emphasises the importance of sticking to what you know and understand, which he calls a ‘circle of competence‘. He reckons that what matters is not how big someone’s circle of competence is, but that they recognise it and stick to it.
That matters because putting money in something you do not understand is speculating, not investing.
Think as an investor, not a trader
Buffett does not simply see a share as a piece of paper that could be worth more in a month than it is now if the price moves up.
Instead, he invests for the long term. Buffett asks himself whether a business is one he would like to own overall. If so, buying shares in it can give him a stake even if only a modest one – and the same is true for me as a private investor.
Take Apple (NASDAQ: AAPL). The company’s share price has moved around a lot since Buffett started putting money into the firm under a decade ago. Over the past five years, for example, Apple stock has more than quadrupled.
Along the way, Buffett has bought some more shares and sold some too. But he remains a huge investor and it is by far his largest holding.
Looking at Apple as a business, it has a lot of the things Buffett has long looked for. It has a strong pricing power, a large potential market that is set to last, and a product ecosystem that helps customers keep buying more products and services over time.
Always consider risks as well as rewards
But even a company as successful as Apple faces risks, from the possibility of regulatory investigations into market competition to a swathe of nimble rivals keen to show consumers that they are now the new kids on the block, just as Apple once was.
Buffett is fastidious about considering risks when investing. Not only does he decide against many investments on the basis of their risk profile, he also keeps his portfolio diversified. That is a simple risk-management tool that can be applied even to a small portfolio.
Look for businesses with ‘moats’
Once people have an iPhone or Apple computer, they get used to the way it works, making it harder for competitors to attract them.
That gives Apple a competitive advantage, something that in turn gives it pricing power. And pricing power helps the tech giant generate large profits.
Think in decades, not weeks or months
Buffett says: “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes”.
That reflects the approach I discussed above. He sees himself as buying a stake in a business with strong long-term potential – so he wants to benefit from that potential.
