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Few investors have been as successful on a large scale as billionaire Warren Buffett. Few have caught other investors’ imagination in quite the same way, either, thanks in part to the way Buffett shares his investing wisdom freely and clearly.
What shares are
In this year’s letter to Berkshire Hathaway shareholders, Buffett said he views shares as “as partial ownership of businesses”.
So while traders look at shares as numbers or bits of paper, Buffett considers them as a stake in a business. If he would not want to own the whole business, why would he buy even a small stake in it?
The fact that shares have a price that can move around a lot distracts many investors, who end up thinking of shares only in terms of their price.
Buffett’s approach is to see the market as a mechanism to buy or sell your shares if you so choose on any trading day – but with no obligation. He has said that if the market closed for years, if would not bother him.
Valuing companies matters
He cautions against confusing price – “what you pay” – with value – “what you get”.
Warren Buffett reckons a good investment does not have to be made at a cheap valuation. But it should, at least, be “attractive”.
Sticking to what you know
As Buffett said in this year’s letter, “every company doesn’t have an easy-to-understand business”. That is why he says it is important for investors to stick to their own “circle of competence”.
That might involve assessing the quality of a company’s current management but it is crucial that it also involves assessing the business model and operations.
Why? Buffett says, “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will”.
Compounding gains over the long run
Buffett’s preferred holding period for shares is “forever”. He is the epitome of a long-term investor.
When he makes money from shares in the form of dividends or capital gains, he does not pay them out to Berkshire shareholders as dividends. Instead, Berkshire reinvests them.
This simple but powerful financial technique (known as compounding) is one that a small investor can use too.
Since 1965, the per-share market value of Berkshire has compounded at 19.9% annually. A long-term approach helps a lot here: the total gain in that period has been an astonishing 5,502,284%!
No need for action, but don’t dabble
Buffett’s quotation above about the stock market closing for years already shows he can happily sit for a long time doing nothing.
But when he finds an opportunity he likes, he tends to act decisively.
A lot of investors like Apple (NASDAQ: AAPL). The market it operates in is huge and likely to grow. Its strong brand, proprietary technology, distinctive design, popularity, and installed user base are all assets.
Sticking to his circle of competence, Buffett watched Apple for decades without investing. He first invested less than a decade ago.
He invested in a big way, investing over $30bn in Apple stock. It is Berkshire’s biggest holding and has made the firm vast profits.
But Apple’s net profits have fallen over the past several years. Factors including increased tariffs and low-cost Asian phone rivals pose ongoing risks. Warren Buffett has cut his Apple stake significantly.
