Learning from proven experts helps me a lot. When it comes to share investments, Warren Buffett has an acclaimed track record.
I think his principles remain as pertinent as ever. He didn’t buy Apple stock until late 2016, for example. According to Buffett’s annual letter to Berkshire Hathaway shareholders, at the end of last year, he retained a stake with a cost price of $31bn. But it had almost quadrupled to $120bn in value in just over four years. That doesn’t even include the dividends!
That’s why, as much as ever, I am following Warren Buffett’s advice when choosing investments. Here’s how.
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Circle of competence
How come Buffett didn’t get into Apple until 2016? The stock’s potential was hardly a secret.
For much of his career, Buffett shunned tech stocks. He recognised that some of them were excellent companies that might reward shareholders handsomely. But he reckoned that he lacked the understanding necessary to judge them. So he chose not to invest in them.
Buffett is clear about his areas of expertise. He is quite disciplined in staying within his circle of competence.
I apply this principle when it comes to new economy stocks like Deliveroo. I don’t know whether it is a good stock or a bad stock for me to buy. I simply don’t understand enough about the economics of food delivery to feel comfortable assessing the Deliveroo share price. By contrast, I feel comfortable analysing the business model and results of a food chain such as Greggs.
Might I miss out on some incredible investments? Yes, definitely.
But I will also miss out on some very bad investments whose risks sit in my blind spot. As Buffett says, “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot”.
Long-term focus
Warren Buffett often looks like the ultimate buy and hold investor.
He has said that his favourite holding period is “forever”. Buffett does sell some shares, but I find this mindset highly instructive.
Take Unilever as an example. I don’t expect the consumer goods company to have a purely smooth future existence. There will be quarterly shifts in sales and profits. Some brands may fall out of fashion. Post-pandemic demand for hygiene products could decline.
Nonetheless, looking years into the future, I continue to see strong tailwinds for Unilever. Its brand portfolio allows it to target different consumer segments in developed and developing markets. Its brands give it pricing power. Global reach enables it to achieve economies of scale.
Indeed, it was by following Warren Buffett principles that I decided to buy Unilever. The Unilever share price may move up or down in the short term. But over the long term I would be happy to hold it for years.
Warren Buffett diversifies
What if I’m wrong about Unilever nonetheless? For example, what if cost competition drives a promising looking enterprise into the ground?
That’s exactly what happened with the fabric business Buffett bought and which gives Berkshire Hathaway its name. But Warren Buffett believes in diversifying. That reduces risk no matter how high quality one thinks an investment is.
I follow that Warren Buffett rule too. That is why I am always on the lookout for more Warren Buffett type shares to add to my portfolio.
