Billionaire investor Warren Buffett started investing in the stock market as a schoolboy and is still at it decades later.
Over that time, he has accumulated a lot of investing wisdom.
Here are five pieces of that Warren Buffett approach that I try to follow and think could help investors both old and new!
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1. Think in terms of buying a slice of a business
Many investors obsess about numbers.
Numbers are important, but they are only a representation of what a business is and how it is performing.
Buffett thinks of a share as a stake in a business. So, while he certainly does look at the numbers, he also asks what I think can be a very useful question: “Is this a business I would like to own?”
If not, why own even a small piece of it?
2. Simple and proven can be a lucrative strategy
Many of Buffett’s big investments are in companies that have proved themselves over decades and have easy-to-understand business models, such as Coca-Cola (NYSE: KO).
Some new investors believe that the way to make money is investing in emerging, complex businesses. Buffett’s more simple approach appeals to me as I like to be able to assess what I am investing in to judge whether I am getting what seems like good value.
Coca-Cola, incidentally, has been a goldmine for Buffett. Not only is the stake now worth far more than he paid for it, but it also generates hundreds of millions of pounds annually in dividends – a key form of passive income
3. Watching without buying can be a smart move
It can be tempting, when excited about a company’s business case, to buy immediately without paying too much attention to valuation.
That can be a costly mistake. A good business does not always make for a good investment.
So Warren Buffett sometimes follows companies for years, or even decades, before deciding to invest. In the stock market, timing is not everything – but it is a very important thing.
4. Too much of a good thing can be a bad thing
Although Coca-Cola is a sizeable shareholding of Buffett’s, he has quite a few others too.
He could have put all of his money into Coca-Cola shares and done very well. But while we know that now, that is with the benefit of hindsight.
Any company faces risks that can sink its share price. Maybe changing diets will lead consumers to move away from sugary drinks, for example, or ingredient inflation will squeeze Coca-Cola’s profit margins. That is still a risk, in my view.
By spreading his portfolio, Buffett ensures that a problem for Coca-Cola (or any other investment) ought to have a limited impact overall.
5. Reinvesting gains to invest more
So far though, Coca-Cola has created a lot of wealth for Buffett.
It has a large target market, a strong competitive advantage thanks to things like its branding, proprietary formula and extensive distribution network and has raised its dividend annually for decades.
What has Warren Buffett done with those billions of pounds in dividends?
He has reinvested them. Putting profits to work like that can lead to higher profits in future. That is a simple but powerful technique known as compounding, that can be used by investors at any level.
