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Putting Warren Buffett’s investment principles into practice

21/09/2020

With a net worth of US $78.9 billion, Berkshire Hathaway CEO, Warren Buffett, is the seventh wealthiest person in the world. He is also considered one of the world’s most successful investors, which is why it’s hardly surprising that many will look to him and his approach when investing their own funds. 

Here, we take a look at three of Buffett’s investment principles and what they could mean for your own portfolio. 

 

“Never invest in a business you cannot understand”

Many people will only have a firm grasp on one or two industries – how they work, who the key players are, the latest industry news and trends – generally, as a result of the career path they have chosen. Most of the listed stocks that they will consider investing in will not be in this space. 

Buffett, for example, has avoided investing in tech stocks, as it is a sector he feels he doesn’t understand. He believes that you should stick to what you know – or to stocks in industries and companies that you can gain a good understanding of with very little effort. 

 

“You can’t produce a baby in one month by getting nine women pregnant”

What Buffett means here is that no matter how great your efforts, good results will take time. Buffett is a firm believer in buy-and-hold investing: committing to stocks and shares for a long period, rather than buying and selling frequently. The theory is that by hanging onto your investments during market cycles, you avoid the risk of missing periods – even of just a few days – that could have a significant impact on your returns. This approach is less labour-intensive, could involve lower commission and fees payments, and could avoid badly-timed decisions – although there are downsides too.

 

“The best chance to deploy capital is when things are going down”

Some are predicting that another COVID-19-related stock market crash is inevitable. Buffett believes that this is the best time to invest. In 2008 – the year that Lehman Brothers filed for bankruptcy – the US stock market lost $1.2 trillion in value on just one day. While many investors were selling hard, Buffett used it as an opportunity to buy. Focusing on strong American companies, he wrote in the New York Times that “most major companies will be setting new profit records 5, 10 and 20 years from now”. 

These – and other strategies – have clearly paid off for Warren Buffett, cementing his place as the seventh richest man in the world. Are there any learnings you can take from his approach?

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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