Legendary investor Warren Buffett is used to handling billions of dollars. That does not mean there are still not valuable lessons to learn from his investing approach that could help me with far more modest funds at my disposal.
If I had a spare £1,000 to invest today, here is how I would go about it inspired by the investing wisdom of Buffett.
Sticking with what you know
I feel comfortable assessing the business prospects of consumer goods firms, for example. But when it comes to shipbroking, my knowledge is weaker. So I would feel comfortable considering whether to invest in Reckitt or Unilever.
But I would not feel comfortable putting money into shipbroker Clarkson without doing more research to improve my understanding of its business model.
Buffett emphasises the importance of staying inside a circle of competence when investing. If I had only £1,000 to invest, arguably that approach would be even more important for me, as my portfolio would be less diversified than Buffett’s, so one bad investment could have a bigger negative impact on it.
Staying diversified
Diversification remains central to Buffett’s investing style, although I am surprised that one share (Apple) now occupies as large a proportion of his portfolio as it does.
Over the years, even Buffett has made plenty of investing mistakes. His stake in Tesco lost him hundreds of millions of pounds nearly a decade ago.
As even a great investor like him can make costly errors in the stock market, it seems unrealistic to think that I might not do the same. Diversifying my portfolio across a range of shares can help reduce the overall impact on my portfolio of such a mistake.
Investing for the long term
Like Buffett, I invest for the long term. If a company has a great business, over time, that ought to help it do better and better. So I do not see any point in jumping in and out of shares frequently. I would rather identify some firms I think have outstanding business prospects, buy them at an attractive price and then hold them for years.
Indeed, he has said if someone is not willing to hold a share for 10 years, they ought not to consider owning it even for 10 minutes!
Staying calm
Investing can be an emotional activity – especially when things are not going well. Buffett demonstrates that it is possible to keep emotions out of investing to a large extent.
One of his sayings that I find helpful is that no share is worth losing even one night’s sleep over. Investing does not have to be emotional. Whether it is, depends on the approach taken.
By learning from Buffett, hopefully I can stay calm even in choppy markets. That could help me scoop up bargains for the long term.
