The Motley Fool

Why I’d ditch playing the National Lottery and follow Warren Buffett’s investment tips

Image source: The Motley Fool

The success of Warren Buffett in selecting high-quality companies has been highly impressive. He’s become one of the richest people on earth simply through buying top businesses while they trade at low prices. As such, his success could be followed by any investor. Certainly, they may not end up becoming a billionaire as per Buffett, but they may be able to retire early and improve their long-term financial situation.

Therefore, investing your spare capital in shares could be a better idea than playing the lottery. It could offer a much higher chance of enjoying financial freedom in the long run.

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...

Value investing

As mentioned, Buffett has built his career on identifying high-quality businesses and buying them at low prices. One of the reasons he is able to achieve this goal is he has a large amount of patience. Buffett is willing to wait many years for a company’s shares to reach a price which he feels affords him a margin of safety versus their intrinsic value. In doing so, he improves his chances of making a high return, while also reducing the risk of loss through buying at a lower price.

Buffett’s ability to identify the best businesses is centred on his consideration of a company’s economic moat. He seeks out stocks that have a clear competitive advantage versus their peers. This may, for example, take the form of a cost advantage or brand loyalty which means a company’s performance is stronger than the wider industry throughout a range of operating conditions. Over time, this can lead to a stronger market position, as well as higher profitability.

Accepting mistakes

Of course, Buffett isn’t immune from making mistakes. All investors sometimes buy companies that turn out to be major disappointments. For example, their economic moat may prove to be narrower than expected, while difficult operating conditions may cause their financial performance to be relatively subdued.

Many investors will hold on to companies that have fallen in value – even if there has been a material change in their appeal from an investment perspective. In such a situation, however, Buffett seeks to cut his losses as quickly as possible. This has meant he’s crystallised paper losses in the past to avoid further losses. However, in doing so, he’s also been able to use his capital more effectively elsewhere, which has led to a better overall performance in the long run.

Ignoring other investors

Clearly, some stocks require time to produce market-beating returns. Therefore, unless the investment appeal of a business has deteriorated, Buffett holds on to stocks even if other investors become less positive about their prospects.

This ability to ignore other investors and make his own mind up about specific stocks means Buffett adopts a contrarian attitude. This allows him to ‘buy low’ and ‘sell high’, which could prove to be a simple and effective means of boosting your returns in the long run.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.