Invest like Warren Buffett

Invest like Warren Buffett

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Six investment tips from the legendary investor

There’s a good reason people want to be like Warren Buffett. The so called “Oracle of Omaha” has a track record unmatched in the investment industry and as a result is a billionaire. Thankfully, Buffett shares his thoughts and strategies freely and his principles provide a solid foundation for any investor.

Let’s explore some of the top investment tips from Buffett, accompanied by some practical examples to help you use these strategies into your own investment portfolio.

Who is Warren Buffett?

Warren Buffet is perhaps the world’s most famous and successful investor.

Investors who invested with Buffett back in 1965 have seen their money compound at an average annual rate of 19.8%. The most comparable index, the S&P 500, has returned an average of 10.2% during that same period. Over 59 years, that translates into a cumulative return 140 times greater than holding the S&P 500.

1. Understand Investment-Related Human Psychology

In contrast to what you might think, much of Buffett’s wisdom is centred around psychology, not financial matters.

That’s because successful investing requires understanding the psychological factors of decision-making. Examples of this abound. One is how Buffett consistently warns against succumbing to herd mentality, to following the crowd. While the crowd may sway in one direction, Buffett advocates for independent thinking and thorough research.

The most successful investors, according to Buffett, possess a mindset that can ignore market fluctuations and make decisions based on analysis rather than popular trends. Buffett says overcoming emotional reactions and focusing on rational thinking based on fundamental business principles is crucial.

Investment Example:

"Be fearful when others are greedy and be greedy when others are fearful.”

When others sell up in a downturn, Buffett invests. During the middle of the 2008 Global Financial Crisis, he invested heavily in seemingly cash-strapped companies such as Goldman Sachs, General Electric, Harley-Davidson and Mars. He knew these were great overall businesses which were nearly certain to recover from the dire economic situation.

In 2020 it was then reported Berkshire Hathaway, the investment company led by Buffett, made a cool $3 billion USD return from its USD $5 billion bailout of Goldman Sachs.

2. Buy Quality Assets

High-quality businesses and assets reign supreme for Warren Buffett, who is known for his aversion to mediocre companies, famously saying, "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price." While Buffett invests in corporations listed on major stock exchanges, this approach applies as much to the stock market as it does to any other investment asset.

Buffett’s commitment to quality over quantity underscores the importance of investing in any asset with robust fundamentals and room for growth.

3. Have a Long-Term Mindset

Buffett discourages excessive trading, instead emphasising the importance of holding onto quality investments for the long term. This approach avoids two common pitfalls:

  1. Errors associated with mistiming the market, such as selling a good investment at a low price.
  2. Friction costs: which is the price of buying or selling an investment, or part of an investment. All investments incur some sort of cost if you, as an investor, want to make changes. One of the most obvious examples of this is if you try and sell an investment property. You’ll soon face hefty bills such as real estate agent fees, marketing costs, a legal bill, break loan fees, minor repairs to tidy the property for sale and more. With some investments these expenses are less obvious, but they still exist in some form.

"If you aren't willing to own a stock (share) for 10 years, don't even think about owning it for 10 minutes," Buffett says. This perspective encourages patience and resilience against short-term market volatility. Once again, this principle applies equally to all potential investment assets.

Investment Example:

"Nobody buys a farm based on whether they think it's going to rain next year."

Warren Buffett’s statement about farms conveys the idea that important decisions, especially significant investments, should not be solely based on short-term or uncertain factors. In the context of buying a farm, it means that one should not make such a substantial purchase based solely on the prediction of favourable weather conditions for the coming year.

Instead, it suggests more critical and long-term factors should be considered when making significant decisions. Some might include the quality of the soil, the location, access to water sources, market demand for the farm's products, resilience in the face of natural disasters, potential for growth, profitability, and overall agricultural and economic trends. These factors have a more lasting impact on the success of the investment compared to short-term weather predictions, which can be unpredictable and subject to change.

4. Avoid Speculation, Buy Productive Assets

Throughout his investment career, Buffett has been tempted by any number of fads, crazes, and genuine alternative investment opportunities.

He has resisted all urges to buy anything based solely on the chance of it increasing in price, and instead has focused on productive assets such as profitable businesses, property, and farmland.

Investment Example:

An example of an asset Buffett has repeatedly passed over is gold, he has never owned the precious metal. Here’s what he has to say about it:

"If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today's market prices about $7 trillion – that's probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobil’s and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I'll take the farmland and the Exxon Mobil’s."

5. Remember Shares Are a Business

In our modern lives, it is often easier to spend money electronically, such as by an EFTPOS card, credit card, Apple Pay, payWave, or similar. That’s because it sometimes seems like we’re not spending at all, a flash of our card and we’re done! Alternatively, if we were to spend hard currency in the form of notes and coins, we might think twice before handing over bills for our Uber Eats or second latte of the day.

So, we might be forgiven for occasionally forgetting that an investment – of any kind – we see pop up on our smartphone, tablet, or computer screen represents real assets.

One of Buffett's fundamental principles is to always remember shares (stocks) are slices of ownership in a business, rather than just a number or a digital asset flashing on a screen.

Always being mindful of this encourages long-term thinking, thoughtful decision-making, and persistence when the investment valuation drops – which all investments will do from time-to-time.

6. Understand Compounding to Increase Your Investment

“My life has been a product of compound interest.”

When you hold on to quality investment assets over a long period of time, there comes a superpower: compounding. Compounding is the process in which an asset’s earnings, from either capital gains, interest, or income such as from dividends or rent, are reinvested to generate additional earnings over time. This growth occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from following years.

Buffett suggests getting started early when it comes to investing to take advantage of the power of compound interest. He describes the power of compound interest as building a little snowball and rolling it down a very long hill. As the snowball rolls down the hill, it collects more and more snow until it becomes a huge snowball.

The Buffett Bottomline: Patience, Discipline, and Long-Term Focus Lead To Successful Investing

Incorporating Buffett's investment tips into your life requires discipline, patience, and a focus on long-term success. By concentrating on quality, understanding the psychological aspects of investing, the maintenance of a long-term mindset, buying productive assets, remembering shares are a business, and maximising the impacts of compounding, you can invest like Buffett.

Ready to start or take the next step on your investment journey? Our team of seasoned professionals is here to help. Whether you need assistance in aligning your portfolio with Warren Buffett's principles or want personalised insights into your investment choices, get in touch to book a complimentary initial consultation with our team.

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