Studying investing icons like Warren Buffett can help investors drastically hone their skills. After all, who better to learn from than those who have consistently beaten the market, making billions in the process.
In the case of Buffett, investors are especially spoilt since he’s been handing out his knowledge free of charge in his annual letters since 1965.
So what are the five best tips investors can learn from the ‘Oracle of Omaha’?
1. Circle of competence
There are many industries for investors to explore when looking for opportunities. But while it may be tempting to follow others into complex sectors like biotech or mining, such moves could be fatal mistakes.
Buffett, for example, has steered clear of the technology sector for decades. It’s only recently that his investment vehicle Berkshire Hathaway‘s portfolio began introducing companies like Apple and Snowflake.
Yet these investments were actually made by his top investing lieutenants, with Buffett only approving them based on their expert knowledge.
This decision to boycott the industry left a tremendous amount of money on the table. But it proves that he sticks to his guns even when others are making money. Simply put, he won’t invest in companies he doesn’t understand.
2. Buffett likes simplicity
Even when exploring industries that he knows well, like banking or consumer staples, individual businesses can still be complex entities. Just because something is complex doesn’t make it good.
In fact, some of his best investments have been exceptionally simple. One prime example is Coca-Cola.
By finding high-quality, simple businesses, investors will find it easier to analyse and make informed investment decisions.
3. Margin of safety
Even after finding a terrific company that seems to be trading at a reasonable price, Buffett doesn’t immediately pull the buying trigger. Why? Because valuation is quite a tricky exercise to get right.
Every forecast and corporate valuation is built on a set of assumptions that often don’t come to pass. External disruptions can come out of nowhere with very little warning. And a firm valued at £1 per share may only be worth 80p.
That’s where the margin of safety steps in. Buffett always adjusts his valuation estimates depending on his level of uncertainty. If there are a lot of unknowns, he’ll only start buying shares when they’re trading at a significant discount to his estimated fair price.
4. Keep reading
For buy-and-hold investors, there’s not much else to do after investing in a high-quality business than wait and watch the money roll in, right? Well, advice from Buffett says that sitting idly isn’t a good tactic. He continues to follow each of his investments closely and also keeps an eye on what competitors are up to.
By constantly staying in the loop, he can adjust his estimate of fair value, or margin of safety, over time. This can potentially reveal new buying opportunities. Or it may highlight a looming threat that nobody else has noticed yet.
5. Think long term
The stock market can be pretty volatile in the short term, as many newer investors have recently discovered. However, in the long run, share prices are ultimately driven by the quality of the underlying companies.
And while it’s easy to get spooked by short-term passim, investment decisions should be based on the long-term picture.
