Warren Buffett is widely considered to be the best investor in the world today. He’s been investing in stocks and shares for the past 60 years. During this time, he has built a tremendous fortune for himself and his investors.
Buffett doesn’t invest in any old business. He has several rules he always follows when analysing companies to determine if they are suitable additions to his portfolio. By following these laws, he’s been able to avoid significant losses over the years. They’ve also helped him dramatically improve his returns and enhance his reputation.
And by following these practices, you may be able to improve your investment returns as well.
Buffett buys cheap
One of Buffett’s top investment laws is to never pay too much for a stock. He uses several different approaches to analyse how much a company is worth, and he always tries to buy at a significant discount to his estimate of intrinsic value. This means buying with a wide margin of safety, in case something goes wrong.
This isn’t the most exciting investment approach. Indeed, the investor only tends to make a few significant trades every year. However, the results speak for themselves. By waiting for the right opportunity, Buffett has been able to achieve market-beating returns for decades.
Buy what you know
Another of his rules is to only invest in companies you understand. The FTSE 100 is made up of 100 different equities and trying to understand every one of these businesses is virtually impossible.
Buffett only buys a business if he knows and understands how it makes money, and it’s long-term growth potential. If he doesn’t understand how the company operates, he stays away. It’s that simple.
By following the same approach, investors may be able to improve their investment returns.
If you don’t understand a business, it’s impossible to tell if it’s a good investment or not. And if you don’t know if a company is a good investment, it’s nothing more than a speculative bet. Speculating on market movements can be a quick way to lose a lot of money.
Focus on quality
Buffett doesn’t buy companies just because they look cheap. He’s interested in quality as well. For example, he’s often paid a relatively high price for a high-quality business, just because these organisations are often more predictable and profitable.
As such, investors may be able to improve their returns by focusing on quality as well as value.
All in all, we can learn a lot from the way Buffett has approached the stock market over the past six decades. Incorporating the three tips above into your investment process may substantially increase your investment returns over the long run. And help you build your financial nest egg.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.