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One of the successful investors whose wisdom I apply when choosing stocks for my own portfolio is Warren Buffett. Best known for running Berkshire Hathaway, Buffett had managed an investment partnership for many years previously. He has therefore honed his stock picking skills over a long and varied career.
Here are three of his investing techniques that I use when buying stocks for my own portfolio.
Think of a business, not an action
The way Buffett thinks of stocks is that they give him a chance to own a share in a company. So he doesn’t just buy a stock because it’s cheap. Instead, he first assesses whether a business is a business that he would like to own as a whole if he could. Then he looks to see if buying the shares could offer him a way to own a part of it at an attractive price.
It may seem obvious. But in fact, I think many investors are doing the opposite. Tempted by high returns or a sharp drop in stock prices, some people buy stocks in companies they don’t think are well run. My purchase of Centrica. The stocks seemed cheap to me and the company had a good dividend history. But would I have bought an entire gas and nuclear energy distribution company at a time when the regulatory future of both activities was uncertain? I would not like. Still, I bought Centrica shares.
Buy without sales plan
Buffett said: “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes. “
It is a very clear investment philosophy. Buffett buys long term with a retention plan, not a sale. It does not time market declines. Buffett is not a trader, he is an investor. But many investors would be happy to buy stocks and sell them in less than a decade. So why does Buffett think his way?
I think this is what he is fundamentally looking for when buying stocks. Buffett tries to identify companies whose sustainable competitive advantages can enable them to generate profits for decades to come. Such companies can be rare. But if an investor finds one, buying their stocks can mean huge rewards in the long run. It also reduces the need to buy and sell, with all the costs of negotiating and labor involved.
From day-trading to even stocks, Buffett wouldn’t be interested. He is a long-term investor looking for large companies with strong growth prospects.
Warren Buffett diversifies
The billionaire investor made some amazing stock choices in his day. So why didn’t he just put it all on them?
Take Apple for example. Buffett made over $ 100 billion in paper profits in Apple stocks in less than five years. Yet he had tens of billions of dollars in cash that he did not invest. Why didn’t he use it to buy more Apple shares?
The answer is risk management. He’s been in the stock markets long enough to know that even the largest companies can run into unexpected difficulties. Buffett sometimes talks about being greedy, but he’s never so greedy that he fails to diversify his holdings.
Christopher Ruane owns shares in Centrica. The Motley Fool UK recommended Apple. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.
