Warren Buffett is the chief executive of Berkshire Hathaway. But to most investors, he is best known for his status as an investment guru.
Here are five investing habits that have contributed to Buffett’s success in picking shares.
In the know
Warren Buffett is highly intelligent, but he is also modest. He doesn’t kid himself about what he doesn’t know, or understand.
By investing only in industries and companies he understands well, Buffett is able to avoid a mistake made by many investors. Investing in exotic companies or emerging industries can seem appealing. But putting money into something one barely understands seems more like speculation than investment to me.
Warren Buffett has expanded his expertise over the years. For example, he used to shun technology stocks but now Apple is Berkshire’s biggest shareholding. However, Buffett only invests in a company once he has done his homework and feels he understands it. If that means missing out on strong performance for years, he is fine with that.
The long view and Warren Buffett
Buffett takes a very long view when it comes to investment. That is apparent when it comes to his preferred holding time for shares: forever.
But this long view also comes through when it comes to researching shares. Buffett has been following companies for years and sometimes decades before he invests in them. By keeping an eye on companies even when he isn’t a shareholder, I think Buffett can develop a fuller, more rounded understanding of their investment potential.
Focus on what he does best
Buffett sees his primary skill as capital allocation. His diary planning maximises the time he spends on that.
He doesn’t get heavily involved in the daily management of most companies in which he invests. He also doesn’t squander time on activities he sees as having peripheral benefit to Berkshire.
Handing over the reins to other people takes trust and confidence. Buffett doesn’t let his ego get in the way. Instead, he delegates a huge amount. That way, he can focus on his biggest investment skill – deciding how to allocate capital.
Like any investor with long experience, Warren Buffett has had his fair share of failures. But instead of dwelling on them or letting missteps undermine his investment strategy, Buffett simply learns from each experience and moves on.
That can be difficult for an investor to do. Psychologically it can be tempting to obsess about mistakes. Buffett is pragmatic – he tries to avoid mistakes but when he makes them he doesn’t let them take on larger significance than they have.
Read, read, read
Buffett is a voracious reader. His typical day isn’t dominated by meetings with bankers or visits to factories his company owns. Instead, he spends hours each day reading.
Someone who flew on a private jet with him noted that he spent much of the flight reading newspapers. “The only reason he hasn’t read more,” she added, “is because we don’t have any more papers on the plane.”
Reading gives Buffett analytical frameworks, data points for investment decisions, and detailed information on companies’ performance. Staying informed is critical to Warren Buffett’s success in identifying promising stocks.
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Christopher Ruane owns no shares in any company mentioned. The Motley Fool UK owns shares of and has recommended Apple and Berkshire Hathaway (B shares). The Motley Fool UK has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021