The Motley Fool

This Warren Buffett investing tip could help you to make a million

There are various pieces of advice from Warren Buffett that could help investors to maximise their return potential. However, there’s one simple tip that could make a vast amount of difference to all investors without requiring any extra effort.

Buffett has only ever invested in companies and sectors that he understands. This has allowed him to leverage the knowledge he has on specific areas in order to improve his overall returns.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Certainly, Buffett has missed out on a number of investing opportunities during his lifetime that could have increased his net worth to an even larger figure. However, by investing only in areas he fully understands, he has undoubtedly avoided losses that have allowed him to generate high returns over the long run.

Avoiding risks

With the cost of buying and selling shares having fallen significantly over recent decades, it’s now cheaper than ever to build a portfolio of varied companies. While this makes it easier to obtain a high degree of diversification in order to reduce risk, it also means it’s less costly to ‘dabble’ in a wide range of stocks, in terms of commission costs. In other words, many investors will buy companies without undertaking comprehensive research into their operations and future growth prospects.

This could be a dangerous move, since it may mean an investor has failed to ascertain the potential risks a specific stock may present. For example, its business model may be unfavourable, or it could face risks that haven’t been factored into its share price. As such, undertaking research into the company and its industry could avoid potential losses that would harm overall returns.

Competitive advantage

As well as avoiding risks, investing in companies you understand can lead to improved returns. For example, if an investor determines they will focus on a particular industry and will gain a significant amount of knowledge on how it operates, they may have a competitive advantage over other investors that enables them to select the most attractive companies within the sector. Over time, this may mean they’re able to outperform their peers, as well as the wider stock market.

Clearly, it’s very difficult to be an expert in every industry. Therefore, it may be worth initially utilising tracker funds for the majority of your capital, since they offer exposure to a diverse range of companies. Then, investing a modest proportion of your capital in industries and companies within your sphere of knowledge could provide the opportunity to outperform the index. Over time, your portfolio may gradually become increasingly weighted to direct equities, rather than being invested in a tracker fund.

Takeaway

Diversification is crucial to reduce risk. However, it can lead to investors buying all sorts of companies they don’t fully understand. As such, following Buffett’s advice on only investing in companies that are within your sphere of knowledge could reduce risk and improve your chances of making a million. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.