In 1965 Warren Buffett took control of Berkshire Hathaway a struggling textile company based in New York. Over the next 57 years, he’s amazed us all by turning it into one of the most valuable conglomerates around. He did this with a fairly simple set of investing principles that investors the world over try to emulate. Here are a few tips I try to follow when making my own investments.

Stay within your circle of competence

The disciplines and sectors in which an investor has a great interest or understanding are referred to as a ‘circle of competence’. We can’t all be experts in everything, but if I’m passionate about a subject, I’m more likely to have an advantage when picking the firms to invest in. By contrast, how will I know which are likely to flourish if I don’t have at least a basic grasp of a specific industry?

Warren Buffett has been criticised for not investing in the internet boom, although he became an Apple investor in 2016. He’d consistently emphasised that he had little understanding of how technology businesses operate or, more significantly, how they earn money. Instead, he concentrated on companies that make things, such as Coca-Cola, or on finance, such as Bank of America…and eventually Apple. The company, of course, makes a lot of very popular physical things, as well as monetising the internet. And me? I’ve been interested in renewable energy for a long time, so that’s where I’m concentrating my efforts.

Well-known investor, Peter Lynch, reiterated a similar view. “I know restaurant managers who invest in IBM, but…why they don’t invest in restaurants. They know how the business works. They know if a restaurant is profitable and what sorts of challenges they face”.

Business fundamentals

Focusing on the fundamentals of a company’s business is another crucial aspect of Buffett’s strategy. How does it generate revenue? What’s the profit margin? Is there a lot of cash on hand, or is it heavily in debt?

Investors can find the answers via a short web search. Financial statements might be intimidating (and boring) to read, but the specifics of the firm are there for anybody to view.

Buffett has long recommended investors avoid firms with a lot of debt and instead seek a lot of cash flow.

Paying down heavy debt loads will eat into a company’s earnings. However, if it has solid cash flow and cash on hand, it can weather storms (like pandemics).

The most prized virtue? Patience

Finally, Buffett is a patient man. Waiting years and years for an investment to pay off is an example of this. It might also be a matter of waiting to invest.

With one important distinction, he once compared investing to baseball. “In investing, no one’s making you swing.” He’s the first to confess that he’s made some poor investing decisions. However, when it comes to investing my own hard-earned money, it’s always best to be careful, and to wait for the right time and the right firm before making a decision.

There’s no way to be certain about any investment, but knowing the company and the industry may provide investors with a significant advantage. Patience can aid us in waiting for the ideal moment.

If it’s worked for Warren Buffett, it may well work for me.

The post 3 Warren Buffett investing tips that helped him beat the market for 57 years appeared first on The Motley Fool UK.

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James Reynolds 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.

Investing tips are easy to come by, but few are geared to when the economy is in a period of uncertainty. With tensions in Europe affecting markets around the world, it can feel like it’s too dangerous to invest right now. But I believe this is the perfect time to prepare, pick up cheap shares, and be ready for when times are more certain in the future.

It’s all about the long game

Even in ordinary times, the stock market goes up and down in unpredictable ways. It may even trend down for a whole year. So, how are investors meant to feel comfortable parting with their hard-earned cash if there’s a chance it could drop in value? By remembering that investing over the long term is the goal.

Long-term investing means making a stock purchase and holding onto it for years and years, possibly even decades. This can be a tough proposition to some. I often struggle with imagining that far in the future. But it’s what gives me pause when the market isn’t moving the way I had hoped. All I have to do is look back in time at the share prices of companies like Amazon and Berkshire-Hathaway to see that they had their ups and downs.

Amazon grew in value by more than 5,000% in the last 12 years. Imagine how upset some investors must feel today if they sold their shares during the 2008 financial crash. Back then Amazon shares were worth around $150. Today, they’re worth $3,000.

Research, research, research

But how do investors build the confidence they need to hold steady through the storm?

The most important investing tip for any beginner is to look at a company’s financial status rather than its share price. These can usually be found with a quick Google search. Look at how much cash it has on hand, how much debt it owes. Look at the profit margins of the company then compare it with its competitors. Does the company offer a product that no one else does?

All of this information can help guide investors towards making a decision they can stick to. Warren Buffett himself believes that all investors should understand the business they’re buying.

Once an investor knows a business inside and out, they can feel comfortable knowing they want to buy it and hold it for years to come.

Buying when the market is down

No one can predict a market downturn, but when they come along that’s when it’s time to go shopping. If the business is sound, makes a good profit, and is likely to continue making sales during periods of contraction, there’s very little reason to think the share price won’t recover. Lots of investors refer to shares like this as ‘on sale’ and buy up as much as they can. This is how Warren Buffett usually makes his investments, although he’s been more cautious in recent years.

Of course, it’s scary watching a share drop in value. A part of my brain always cries out ‘What if it goes to zero?’ But when I’ve done my research and know that the company is profitable and growing, I can be confident that this share price movement is only temporary.

The post Investing tips for uncertain times that beginners need to know appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. 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.

Warren Buffett is without a doubt one of the best investors alive today. He is so well known that even people who aren’t interested in investing know his name. But how does he know which companies he should invest in and how is he right so much of the time? Luckily for us, he has imparted much of that wisdom into books, interview, and letters, all of which we can study today.

Circle of competence

A circle of competence is the subjects and industries in which an investor has a keen interest or understanding. We can’t all be experts in everything, but if I have an interest in a topic, I’m more likely to have an advantage when choosing which companies to invest in. Conversely, if I don’t have at least a reasonable understanding of a given sector, how will I know which businesses are likely to succeed?

Warren Buffett has been criticised in recent years for not investing in the tech boom. But he has always stated that he doesn’t understand how tech companies work or, more importantly, how they make money. He instead focuses on business that produce products, like Coca-Cola or on banking, like with Bank of America. I for my part don’t understand anything about banking but have been very interested in renewable energy for years, so that’s where I focus my attention.

Another famous investor, Peter Lynch, echoed this sentiment in an interview he gave to CNN. “I know restaurant managers who invest in IBM, but I always ask why they don’t invest in restaurants. They know how the business works. They know if a restaurant is profitable and what sorts of challenges they face”.

Fundamentals

Another important part of Warren Buffett’s strategy is to focus on the fundamentals of a business. How does it make money? How much money does it make? Does it have a lot of cash on-hand or is it in a lot of debt?

All of this information is readily available to investors with a quick online search. Reading financial statements can be a little overwhelming at first (and sometimes quite dry) but the details of the business are there for anyone to see.

Buffett has always advised to stay away from companies with a lot of debt, and to aim towards ones with good cash flow.

If a company has a lot of debt, paying it down will cut into its profits. But if it has good cash flow and money in the bank, it can weather unexpected storms (like pandemics).

Warren Buffett is a patient man

Finally, Buffett is always happy to wait. This can be waiting years and years for an investment to become profitable. Or it can be waiting to even make an investment.

The man once compared investing to baseball, with one key difference. “In investing, there’s no-one telling you to swing.” Buffett is the first to admit he’s missed out on some good investments. But, when we’re using our hard-earned cash, it’s always better to be cautious; to wait for the perfect moment and the perfect company before making an investment.

There is no way to be absolutely sure of any investment, but understanding the business and knowing the sector can give investors a serious advantage. Patience can help us to wait for the perfect moment.

If it’s good enough for Buffett, it’s good enough for me.

The post Warren Buffett: how the world’s best investor chooses stocks appeared first on The Motley Fool UK.

More reading

• Up 50% in a year! Now check out the intriguing BP share price forecast for the next 12 months
• Is now the perfect time to buy high-yield FTSE 100 dividend shares? 
• At 7,000 points, the S&P 500 looks bloated. How should investors navigate this market?
• How £100 can start a portfolio of UK stocks
• How £16,000 can generate a second income in a Stocks and Shares ISA

James Reynolds has no position in any of the shares 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.