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As investors in the 2020s can we still learn from the techniques of Warren Buffett?
After all, he is a billionaire but a lot of the approach he takes to investing was forged in the 1960s, 1950s, or even earlier.
In fact, I think Buffett’s approach is just as relevant today as ever. Plus, the Sage of Omaha has lived through multiple stock market booms – and crashes. That sort of experience could be invaluable as I try to navigate the stock market in uncertain times.
Here are a few of the elements of Warren Buffett’s approach to investing that I hope can also help me as I aim to build wealth.
Focus on the long term
Could a hot share shoot up tomorrow, or next month?
In general, Warren Buffett does not care. Yes, he likes to buy shares for less than they are worth – ideally much less. But his timeframe is a long-term one. He is investing with the idea of holding shares for years or even decades. Indeed, his shareholdings in companies such as Coca-Cola go back decades.
Come up with just a few brilliant ideas
Looking at the billions upon billions of pounds that Warren Buffett had made in the stock market, it would be easy to imagine that he sits for hours every day coming up with investment ideas.
It is true that Buffett typically spends hours a day reading about different businesses. But in fact he invests in very few. Buffett has said that his success basically boils down to one brilliant investing idea every five years or so.
That is because he is focused on ideas that can really move the needle. He does not have much interest in buying shares he thinks offer the prospect of just a quite good return. Instead, he likes to wait for outstanding opportunities and then go for them in a big way. Even as a private investor with limited means, I believe the same approach could help me build wealth in the stock market.
Finding great companies and holding for the long term
As an example, consider a share I bought this year that I think meets many Warren Buffett criteria (and indeed he owned it some decades ago when it had a different name): Diageo (LSE: DGE).
Buffett looks for businesses that have large addressable markets likely to stay that way. Beer and spirits meet that description. He also likes firms to have a competitive advantage, something he calls a “moat” (as it helps keep rivals at bay). Diageo’s premium brand portfolio gives it such a moat. After all, many of its drinks are unique.
That gives the firm pricing power. Pricing power helps profits, which in turn help fund dividends. Just like Coca-Cola, Diageo is a Dividend Aristocrat that has raised its dividend annually for decades.
I do see risks, explaining recent weakness in the Diageo share price. One is lacklustre demand in Latin America, that has eaten into revenues and profitability.
But that has given me the chance to buy into what I see as a great business at an attractive price, the way Warren Buffett aims to do.
