US billionaire Warren Buffett draws tens of thousands of people to his company’s annual general meetings. He’s said to have a net worth of more than $80bn.
Mr Buffett’s success as a long-term investor is legendary. Shares in his company Berkshire Hathaway have risen by about 1,000% since July 1996, helping many of the firm’s shareholders to achieve financial independence.
Many top investors only share their investing wisdom with paying customers. But Mr Buffett is known for his open approach and shares much of this thinking in Berkshire’s annual letter to shareholders, which is freely available to all.
In this article I’m going to look at three of Mr Buffett’s tips which I believe could help you achieve your own financial independence.
Mr Buffett has a reputation as a value investor and started his career buying so-called cigar butt stocks. But he soon moved on to focus more heavily on quality businesses with lasting advantages. This is reflected in one of the Sage of Omaha’s most famous quotes: “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”
The idea behind this is simply that, over the long term, quality businesses grow more reliably, generate more spare cash and command higher valuations. All of which is good news for their shareholders.
Don’t ignore serious problems
He is a long-term investor and once suggested that you should “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.
But following a long-term style doesn’t mean you should stick blindly with a company that’s got serious problems. Sometimes the best thing to do is to abandon ship, as he explains: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
One example of this situation was in 2013, when Berkshire Hathaway started selling its shares in Tesco, which it had held since 2006.
Although I rate Tesco as an investment today, it’s worth noting the shares are still well below the 300p+ level at which Berkshire started selling in 2013. Sometimes, you just have to get out. In my experience, it’s usually a great relief when you do.
Here at the Motley Fool, we believe in long-term investing. Short-term traders tend to rack up costs and even winning trades often have fairly small profit margins. In the stock market, big wins usually take time.
Mr Buffett takes an even stronger view on this: “The stock market is designed to transfer money from the active to the patient.”
One of the hardest things for many investors to do is nothing. But this is a standard part of Mr Buffett’s routine. He says that he spends much of each day “reading and thinking” and emphasises that you should only act when the time is right.
You can’t get much clearer than that.
So to finish off, here’s a quick recap of what I’d take away from his success. Do your research and buy for the long term. But don’t be afraid to act when you realise you’ve made a mistake.
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Roland Head owns shares of Tesco. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.