Investing in the stock market can be a daunting affair, for professionals and newcomers alike. I try to improve my chances of success by learning from highly successful investors such as Warren Buffett. He is a multibillionaire — and the basis of his wealth is decades of investing in good businesses and shares.
Here are a couple of things I have learnt from the great man that I bear in mind when thinking about what shares to buy (or sell) and the stock market in general.
Meet the market
A lot of people believe a share soaring or crashing are reasons enough to panic. But what should they really do?
In Buffett’s case, the answer, often, is nothing. He does not let the stock market tail wag the investment dog.
That is because, for Buffett, the price of shares alone is not important. What matters is finding brilliant businesses that sell at attractive valuations.
He illustrated this by introducing the idea of ‘Mr Market‘ (or in a more acceptable gender-neutral version for today, ‘the market’).
This is someone who every day offers to sell someone any share at a given price – or to buy them at more-or-less the same prices (there is normally a slight difference between the buying and selling price of a share). But he only offers you the option – there is no obligation to act.
That means the stock market is far more liquid than, say, the property market. A dream house may not come on the market for decades, after all.
But this analytical lens is also a useful reminder not to fixate on share price movements. Rather, I try to build wealth by buying into outstanding businesses at what I think are cheap valuations.
Focus on the long term
Buffett sometimes sells shares. He used to own Tesco shares, for example. His preferred holding time however, is “forever”. That may be literal as he has owned shares such Coca-Cola and American Express for decades.
I think the word ‘forever’ in this context is also metaphorical. Buffett is articulating his preference to buy into great businesses with long-term potential and keep on performing so well he sees no need to sell.
Take his biggest shareholdeing (by far), Apple (NASDAQ: AAPL). Does Apple have a large addressable market? Yes. It alone has a customer base in the hundreds of millions and rivals also have a lot of customers. I expect demand in the digital space to keep growing.
Is there a competitive advantage? Again, yes. Apple’s customer base, product, service ecosystem and unique technology all give it a competitive advantage and pricing power. Still, I do see a risk that it could be eventually overtaken by a rival with better technology Apple cannot replicate, for patent reasons.
What about the numbers? Apple is massively profitable and generates huge free cash flows.
What I do not like about Apple at the moment is its valuation. Buffett built his large stake when the shares were much cheaper. By continuing to hold he likely expects to create more value over the long term.
At today’s price though, I would not add Apple shares to my ISA even though I think it is an excellent business.
