June 16, 2024
Investments

New to investing? I wish I’d known these 3 Warren Buffett approaches!


Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

Billionaire investor Warren Buffett has been buying shares for a long, long time.

But we all have to start somewhere. One of the challenges when someone decides to start buying shares is where to begin.

Learning from Buffett has helped me tremendously as I aim to build wealth in the stock market. Here are three Buffett investing ideas I wish I had known from day one!

Focus on scoring goals not regretting missed ones

Every pub bore worth they salt has some story of how they “knewApple (NASDAQ: AAPL), Amazon or the like was going to be huge but did not invest early on, missing the potential to make millions.

Buffett actually has made billions (in fact, he has made billions of dollars from his Apple stake alone over the past few years).

What is his approach to regretting missed opportunities? In his annual Berkshire Hathaway shareholders’ letter released last weekend, he had this to say about potential businesses to buy: “If I missed one – and I missed plenty – another always came along.”

Buffett does not focus on worrying about the ones that got away. He is too busy trying to find the next opportunity.

Err on the side of safety

In that letter, Buffett had this comment about risk management: “One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital”.

I must confess, I find that a slightly confusing statement. After all, as with anyone investing in the stock market, Buffett clearly has risked permanent loss of capital. Indeed, Berkshire lost hundreds of millions of pounds on a shareholding in Tesco it sold a decade ago. All shares carry at least some risk of losing capital.

My interpretation is that Buffett here is arguing that maintaining capital ought always to be uppermost in the mind of an investor, whether they are a novice of have decades of market experience like him.

If he sees a red flag that makes an investment uncomfortably risky, Buffett typically avoids it no matter how high the potential rewards may seem.

Proven business models are attractive

Does Buffett like to invest in little-known start-ups that have yet to prove their business model?

Sometimes, the answer seems like yes. Berkshire’s stake in Chinese electric carmaker BYD arguably matches that description.

But usually he sticks to long-established, well-proven businesses. Consider his comment on two large long-term shareholdings: “American Express began operations in 1850, and Coca-Cola was launched in an Atlanta drug store in 1886. (Berkshire is not big on newcomers).

Apple is a more modern company. But it was already a proven tech powerhouse by the time Buffett started buying his current stake in 2016. It generated large free cash flows and made huge profits, then as now.

Buffett is smart enough to know there can be too much of a good thing. Apple faces risks like competitors patenting new technology. And Buffett has lately been trimming his stake a little.

What is clear is that the great man prefers to invest in proven winners he believes have a strong future ahead of them.



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