Image Source: The Motley Fool
Investor Warren Buffett has had a spectacularly successful career buying stocks. In fact, he is a billionaire many times over, and much of that is due to his strategy when it comes to choosing stocks to own.
But Buffett’s approach is no secret. In fact, he publishes much of his thinking, which means that a small private investor like myself can apply some of the same principles when choosing stocks for my own portfolio.
Here are seven Buffett habits that I hope can improve my own investment returns.
1. Do the research
Buffett lives far from Wall Street. He spends most of his workday sitting alone in his office reading. In fact, he often reads hundreds of pages a day, including company reports.
Doing a lot of research means Buffett is well-educated and well-informed. That has been critical to his success, and it’s something I can do too.
2. Circle of competence
The Sage of Omaha stresses the value of sticking to one’s circle of competence. Invest only in businesses you understand and can evaluate.
Applying the same discipline should help me avoid making terrible investment decisions by putting money into a business when I can’t judge its prospects.
3. Look at the business model
Buffett likes profit. But he doesn’t just focus on whether a company seems profitable. He asks the question that I think any investor should keep in mind: does a business have a model that should allow it to be profitable in the future?
For example, Buffett owns shares in companies like Coca Cola and amexpress because those companies have unique brands and assets in markets that look poised for long-term high customer demand. Therefore, they have business models that will hopefully enable future profits.
4. Keep things simple
Buffett tends to stick to companies with fairly simple business models. He also does not invest in businesses that he believes have overly complicated accounting methodologies that he cannot understand.
That means it keeps things simple.
Rather than try to outsmart other investors, Buffett is happy to take a simple but proven investment approach. He tries to buy shares in big companies when they cost much less than he thinks they’re worth.
5. Diversification
However, even Warren Buffett makes mistakes. In fact, last month he told his company’s shareholders: “Over the years, I’ve made a lot of mistakes”.
But Buffett always keeps his portfolio diversified across several stocks, to limit the overall impact on his portfolio of any one mistake. I do the same.
6. Be patient
Buffett has said he wouldn’t mind if the stock market shut down for years.
Does it sound weird? I think Buffett’s point is that he buys into what he sees as outstanding businesses and plans to hold them for the long term.
Such stocks may not often trade at an attractive price, but Buffett has the patience to wait years before investing.
7. Keep calm
Some investors are frantic, others are very stressed.
And Buffett? He has said, “I won’t trade even one night’s sleep for the possibility of additional earnings.”.
I think it’s a useful approach for me as a private investor as well, especially in today’s turbulent markets.
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