After decades in the stock market, billionaire Warren Buffett continues to demonstrate how a smart-yet-simple approach to investing can help people build wealth.
This year, Buffett has been far from idle. One notable move has been reducing the size of his company’s stake in Apple (NASDAQ: AAPL).
Here is a handful of Warren Buffett moves I expect to make in 2025 when it comes to managing my own portfolio.
Image source: The Motley Fool
Not ignoring the obvious
Sometimes, a great idea is hiding in plain sight.
Buffett has made tens of billions of pounds thanks to his Apple stake. But a decade ago he did not own a single share in the tech company, even though it was already very well-established and successful.
Just because a company is well-known and lots of people already think it is a good investment idea does not necessarily mean it is too late to get on board.
Focusing on the business model
Buffett likes good management but when investing he does not rely on it. As a long-term investor, he realises that managements change over time – and not always for the better.
What Buffett really focuses on when investing is how powerful a company’s business model is. For example, how large a market can it target and what competitive advantage or ‘moat’ can help set it apart from rivals in doing so?
Again, Apple is a good example. The demand for phones and tech products is huge and Apple has built competitive advantages ranging from a large installed user base to proprietary technology.
Using money to earn more money
Apple pays dividends to shareholders such as Warren Buffett, like many of his other investments.
In fact, his firm earns billions of pounds annually in dividends. Rather than using those funds to pay a dividend to its own shareholders, it reinvests them. This is known as compounding.
Buffett compares the process to pushing a snowball downhill. As it goes, it picks up more snow that in turn picks up even more snow. Over time, that can lead to exponential growth.
Sticking to what you know
Buffett is the first to admit that he has expertise in some industries, such as insurance, but not others.
By sticking to his “circle of competence”, he aims to improve his chances of success in the stock market. I will do the same in 2025.
Managing risk
Buffett says that the first rule of investing is not to lose money and the second rule is to never forget the first one.
Easier said than done, of course, but it makes an important point about risks and rewards. It is easy to focus on potential rewards, like the massive profits Buffett has made due to a soaring Apple share price. But it is also important to pay due heed to risks.
Apple’s success meant that it had come to dominate Warren Buffett’s portfolio. Cutting his stake has improved his diversification. That helps reduce the potential impact on him of risks such as lower cost phone companies eating into Apple’s market share.
Diversification is a simple but important risk management tool – and one I plan to use in 2025 and beyond.
