Billionaire Warren Buffett built his fortune investing in businesses. And there’s much to learn from his methods, so I’d use three of his insights to help me invest in businesses by buying some of their shares.
A ‘risk-first’ approach
The first is Buffett’s famous rule number one: never lose money. At first glance, that sounds obvious, right? At least, it did to me when I started out.
However, it really means that right out of the gate, investors should approach all their investments by looking at risks first.
But my natural inclination was to do the opposite! When researching businesses, my thoughts were all about how much could potentially be made after buying some of the shares – wrong!
As an investor and speculator, my first job is defence, not attack.
Here’s a quote from American billionaire hedge fund manager Paul Tudor Jones: “I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.”
After years of investing with unspectacular overall results, I finally learned my lesson.
Now my main focus as an investor is seeking to protect my money before growing it. Sometimes skilled investors say: “Capital protection before reward generation”. I think that’s good advice.
Wonderful businesses
But how’s it done? I’d use a second insight from Buffett to help me.
He often talks about the stock market being full of mediocre and poor businesses with just a handful of exceptional ones.
Buffett doesn’t buy stocks very often. But when he does, the opportunity is likely to be one of those rare exceptional situations. Quite often, he talks about investing in “wonderful” businesses.
I’d aim to protect my money by looking for exceptional opportunities. And when I’ve identified those few wonderful businesses available on the stock market, I’d watch them like a hawk.
If the market ever offered a fair valuation for those enterprises, my aim would be to buy some of their shares with my £2,000 to hold for the long term. Meanwhile, I’d shun the stocks of lower quality businesses with the aim of protecting my capital from the increased risks they often carry.
Compounding earnings
Having done my best to protect my capital by buying the stocks of wonderful businesses at fair prices, the final step is to use a third insight from Buffett. And that insight is the way he uses the power of compounding.
Quality businesses will often do all the heavy lifting for investors by compounding their growing stream of earnings over time. All I’d need to do would be to hold stocks long term as the underlying businesses work like compounding engines within my portfolio.
So I’d avoid frequent stock trading and shorter-term holding strategies and aim to copy the results Buffett has achieved by holding stocks in companies such as Apple, Kraft-Heinz and Coca-Cola.
Despite following these Buffett insights, all businesses and stocks carry risks as well as positive potential. However, I’m optimistic there will be a decent chance to build wealth by investing in the style of Warren Buffett in 2024 and beyond.
