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New to investing? I wish I’d known these 3 things Warren Buffett swears by

Young woman holding up three fingers
Image source: Getty Images

Warren Buffett first bought stocks in 1942, at the age of 11. This early investment marked the beginning of his long and legendary billionaire-making career in investing.

At 11, I was probably still climbing trees somewhere. I wasn’t reading the Financial Times!

But we all begin investing at different times. Here are three Buffett investing ideas I wish I’d known from day one.

Look for moats

When I first started, I made a couple of costly mistakes, investing in companies that had no durable competitive advantages. Or moats, as Buffett calls them.

As with a medieval castle, a moat keeps rivals at bay. Here are some:

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  • Brand loyalty: customers fiercely love the brand (think Apple or Coca-Cola, two Buffett stocks)

  • Switching costs: it’s very inconvenient for customers to jump ship to a competitor (Microsoft)

  • Network effects: the value increases as more users join (Meta‘s Facebook, or Visa and Mastercard)

A strong moat protects a company’s profits in the long run. Therefore, the first question when considering an investment should always be, does this business have a moat?

Sell investments

In 1985, Buffett wrote: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks“.

This is also something I struggled with. When my original investment thesis had proven wrong, I’d stubbornly hold onto a stock for too long, hoping for a turnaround. Then I’d lose even more money.

It’s better to sell up and move on when losing conviction in an investment. After all, to get back to even after a 75% drop, a stock would need to rise by 300%. That might never happen.

Valuation matters

Finally, valuation is very important in investing. It’s not the be-all-and-end-all, in my experience. Some of my best-performing stocks have been ‘overvalued’ when I bought them, according to traditional metrics.

Nvidia, for example, or Intuitive Surgical.

But valuation does matter. Apple, for instance, is trading at 7.4 times sales, despite Wall Street expecting just 4% growth in the next two years. It’s trading at 29 times earnings, the multiple of a growth stock.

Of course, Apple’s a wonderful company with a wide and deep moat. But also knowing the valuation might make me consider whether there are better opportunities elsewhere.

Using this information

Connecting the dots here, I’m going to briefly talk about boohoo (LSE: BOO).

As we can see above, shares of the fast-fashion firm have fallen off a cliff. One big reason is that competitors — notably China’s Shein — have come along and started to poach its customers.

In its last financial year, the firm reported that its revenue fell 17% year on year to £1.5bn, while its pre-tax loss widened to £160m from £90.7m a year earlier.

I owned boohoo shares a few years ago. But I sold them when they were trading at 60 times forward earnings (valuation matters).

Moreover, I was concerned about how quickly Shein was able to scale and attract customers in the UK (lack of moat).

Perhaps boohoo can cut costs, win back customers and rebuild profitability. If so, the stock could rise from the ashes. However, the lack of a durable moat prevents me from investing.

I’d prefer to consider other stocks.

The post New to investing? I wish I’d known these 3 things Warren Buffett swears by appeared first on The Motley Fool UK.

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Ben McPoland has positions in Intuitive Surgical, Mastercard, and Visa. The Motley Fool UK has recommended Apple, Intuitive Surgical, Mastercard, Microsoft, Nvidia, and Visa. 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 2024