Warren Buffett is one of the most successful investors in history. Through Berkshire Hathaway, he has outperformed the market year-on-year. By looking at how Buffett operates, I think retail investors could strengthen their overall performance. So how does he do it?
Buffett puts a lot of his success down to his voracious reading habit. Reading creates knowledge, which builds up like compound interest. Investors would do well to study anything they can get their hands on, like company reports, newspapers, Twitter feeds, financial websites and, of course, The Motley Fool.
The important thing here is to apply what you’ve learnt and frame it in your investing mindset. For example, did the newspaper mention government targets for new home builds? Then maybe stocks in building companies will increase.
Add investing books to the list. Especially works by value investors like Benjamin Graham, one of Buffett’s mentors. Although the books might be old, they will help to teach you the principles of value investing and how to identify strong, undervalued companies.
Invest in what you know
Buffett avoids buying stocks in companies he doesn’t understand. Famously, he has shied away from investing in tech stocks, a move that helped him miss the worst of the dot-com crash.
Recently, he shocked the market by taking a large position in Apple. What was the Sage of Omaha doing buying a tech stock? It was simple: Buffett viewed it as a consumables stock, offering a great product that had customer loyalty.
For example, if you’re in the insurance industry, you may be able to identify what qualities a successful insurer needs to become profitable.
I would avoid buying shares in a company without fully understanding how it generates its revenue.
Invest in management
Often, as investors, we look at the underlying financial components of a company. We go boggle-eyed looking at statistics, consumer trends and ratios, yet fail to look at who is steering the ship.
Buffett has been known to sweep up whole companies and retain the management, as he sees a special quality in them. He will only invest in companies that he can trust and thinks will operate with shareholders’ best interest.
I think it is really important to know who you are investing in. After all, if you can recite your football team manager’s CV, perhaps you should do due diligence on the people who will ultimately be responsible for your hard-earned cash.
Invest for the long-term
Buffett’s favourite holding period is forever. He scrutinises each purchase as if he was buying the whole company, which of course, he sometimes is.
Investors should do the same. In the digital age, where it is possible to purchase shares by tapping your phone, people might make the decision to purchase lightly.
Buying stocks should carry the same weight as buying an asset like a car or house.
Watch your costs
Buffett has for a long time criticised the high fees that money managers have charged. Investors should shop around and make sure they aren’t paying away too much of their profit.
The same goes for lifestyle choices. Buffett is notoriously frugal. Track your expenses and see where you can cut back.
After all, any money saved can compound for years to come.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.
T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple and Berkshire Hathaway (B shares). The Motley Fool UK has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). 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.