What investors can learn from Warren Buffett
Six investment lessons that could benefit individual investors.
Most people will have heard of the legendary investor Warren Buffett, one of the most well-known and influential value investors of the modern era.
A couple of months back, after 60 years at the helm of Berkshire Hathaway, Warren Buffett announced his retirement at the age of 94.
Over that period, he built Berkshire Hathaway from a failing textile maker into an investment juggernaut worth $1.16tn (£870bn), according to the BBC.
Considered by many to be the most successful investor of the 20th century, Buffett has consistently appeared on lists of the world’s wealthiest people, despite giving away vast sums of his fortune.
Over the years, a lot has been written about Buffett’s investing style so, in this article, we’ve put together some of his valuable lessons which can help us all to become better investors.
- Take a long-term view when investing
Throughout his career, Buffett has emphasised the potential long-term value of stocks and shares. He famously said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” This serves as a reminder that seeking quick returns can cause investors to miss out on substantial long-term gains.
Many factors influence investment values, making it impossible to consistently time the market. Historically, investment markets may experience short-term fluctuations, but they have generally delivered positive returns over longer time periods. Investors who intend to hold their investments for the long-term stand to benefit.
- Risk comes from not knowing what you’re doing
Buffett advised investors to focus on companies within their “circle of competence.” This means sticking to areas you understand, even if other opportunities seem tempting.
For example, many first-time investors have begun trading in stocks and cryptocurrencies without fully understanding how these asset classes work.
Buffett himself initially struggled to value technology stocks for a long time, leading him to avoid these investments for many years. It wasn’t until 2016 that Berkshire Hathaway invested in Apple after thoroughly understanding the company’s business model.
However, Buffett’s avoidance of technology stocks did not hinder his performance. In fact, a performance chart comparing Berkshire Hathaway to the Nasdaq shows that Berkshire Hathaway outperformed the Nasdaq for most of the last two decades.
The key takeaway from Buffett’s approach is that if you know what you’re doing, there are plenty of opportunities available in the market.
- Be greedy when others are fearful
Buffett consistently took advantage of market declines, perceiving them as opportunities rather than threats. During market crashes, numerous investors panic and liquidate their assets, frequently incurring substantial losses.
Buffett however regarded these instances as ideal for acquiring high-quality companies at reduced prices. The rationale behind this approach is simple: market downturns frequently result in temporary mispricings, leading stock prices to drop significantly below their intrinsic worth.
This phenomenon occurs because panic selling is motivated by emotion rather than logical assessment. Investors often overreact to adverse news, presuming that short-term issues will irreparably damage a company’s future.
Conversely, Buffett looked past the immediate turmoil and assessed whether the business remained fundamentally sound. For example, during the financial crisis of 2008, numerous financial stocks plummeted as investors feared a systemic failure.
Recognising that the crisis was temporary and that robust banks would eventually rebound, Buffett invested $5 billion in Goldman Sachs and subsequently made a similar investment in Bank of America. These acquisitions, made amidst widespread market fear, resulted in significant long-term profits.
- Be fearful when others are greedy
Just as Buffett bought when others were fearful, he also exercised caution when markets were booming. He warned against blindly following euphoric trends, as overconfidence can lead to asset bubbles and unsustainable valuations.
A notable example of Buffett in action was the dot-com bubble of the late 1990s. Many investors invested heavily in tech stocks without evaluating their actual earnings or business models. However, Buffett avoided the frenzy, choosing not to invest in tech companies he did not understand. When the bubble burst in 2000, wiping out trillions in market value, Buffett’s discipline was reaffirmed. His hesitance to pursue trends is the foundation of his investment philosophy.
Following the herd and making investment decisions based on FOMO (fear of missing out) can often lead investors to make choices that don’t align with their strategy, simply because they perceive these investments must be good or safe because others are investing in them.
It’s essential to recognise that what constitutes a “good” investment will vary according to your individual objectives and needs, and decisions based on FOMO could well conflict with your own financial goals. Getting some financial advice can help you make the right decisions.
- Don’t be drawn in by “bargains”
While finding a bargain can be exciting, focusing solely on price when evaluating an investment may lead to poor decisions. Instead, consider the overall context: how will this investment fit into your larger portfolio, and does it align with your investment goals?
Buffett advised, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
- Make investing part of your broader financial plan
When developing or reviewing your investment strategy, it’s easy to view it in isolation. However, incorporating your investment strategy into your overall financial plan can lead to better decision-making. For example, your overall financial situation and goals will influence your investment risk profile.
Taking these factors into account when evaluating investments can help you find a suitable balance to meet your overall financial needs. Without this broader perspective, you risk taking on inappropriate levels of risk. Buffett remarked, “It is insane to risk what you have and need, to obtain what you don’t need.”
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Warren Buffett was a remarkable man in many ways, and we can all learn something from his investment style and lessons. As financial planners, we can help you create a balanced investment portfolio that you can have confidence in, if you want to take a hands-off approach.
An investment strategy that’s been tailored to your needs could lead to returns that help you reach your long-term goals. So please do not hesitate to get in touch to talk to us about your investment plans.
Please note
This article is for general information only and does not constitute financial advice, which should be based on your individual circumstances.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.