Warren Buffett's Long-Term Investment Strategies Advice

Sep 9, 2020 05:36 AM ET
Warren Buffett's Long-Term Investment Strategies Advice

Warren Buffett is arguably considered one of the largest financial investors in the last century. Having started his investing journey back when he was in his teens in 1950, Buffett grew to become the no. 1 ranked individual in Forbes’ list of the wealthiest people on the planet. His immense success in the stock market has made him a sort of enigma among traders and financial scientists. Apart from creating unique strategies for trading success, much of Warren’s ability can be explained by a sustainable competitive advantage he has over other investors in a particular market niche. 

Warren Buffett’s Approach and Strategies

There are many reasons why Warren Buffett has successfully become one of the most successful investors in the stock market for the past 30 years. His entire approach puts heavy emphasis on the market price as well as the value of a business. Once he selects a suitable business that he seems comfortable with, he behaves more like a business owner and less like just a speculator in the stock market. 

This requires gathering complete insight into the business, being an expert in that particular field, and working in tandem with the management instead of against it. This is perfectly felt when Buffett purchases shares of any company. Most of that time he grants the managers his proxy vote for his shares.  He does this to send a message about his intention to not try and move the company in a different direction away from its core principles. 

When describing Buffett’s strategy, we see that it is a combination of two strategies from Philip Fisher and Ben Graham, two investment advisers of the 1930s. From Fisher, Buffett realized the value of management in any business. He also realized that diversification increases risk rather than decreasing it. This is because it becomes nearly impossible to closely monitor your investments when they are spread across a wide variety of instruments and sectors. 

From Ben Graham, Buffett learned using quantitative and strict guidelines to purchase shares in companies that are selling them for less than their net capital. This is known as the “margin of safety” approach. He also realized that stock positions should be based on the long-term as short term fluctuations are valueless. 

Buffett’s Advice to Young Investors

Warren Buffett has always said that experience is the key to the success of an investor. He has from time to time, divulged some advice and tips for newcomers in investing. Some of the most important points can be summed up in brief below. 

Investing Is Not A Short-Term Affair

According to Buffett, investing is not a fast way to make money. You should always invest after considering your long-term goals. This is evident from Buffett’s own practices as he never engaged in Intraday or positional trading. 

Take the Opportunities 

According to Buffett, you need to quickly jump on any opportunity as they occur. For instance, you need to further invest heavily when the odds are stacked in your favor. This can take the form of stock prices going down significantly. In such a situation, you should invest aggressively as good prices might not come again anytime soon. Buffett himself applies this method when markets are down. He invests heavily when stock prices are in the red after amassing a lot of funds. He can apply this at any time since he has a lot of safe cash. 

Never Invest in Organizations You Do Not Have Knowledge Of

By knowledge, Buffett indicates the nature of a business and how a particular company works. You can easily make the mistake of investing in a particular brand, just because you have heard a lot of good things about it. However, because of your lack of comprehension, you can lose money in the long term as you fail to recognize the value of the business.

Thus, for an investor, it becomes very important for them to know the company fully and understand whether there are any economic issues that can arise in the future before purchasing its shares. The best advice is to avoid companies that you do not understand completely. 

Contrary to Popular Belief, Diversification Is Not Always Good 

Many successful investors opine that diversification is a necessary tool when investing in the stock market. However, Buffet disagrees with this concept completely. According to him, diversification is meant mainly for individuals who not possess any real investment knowledge. This is why experienced stock traders select long-term stocks with confidence. 

One of the main reasons why most investors tend to go for diversification is because they are afraid that a bad performance in a single stock might drag their entire portfolio down with it. However, when one goes for this approach he/she inadvertently lose focus on their individual investments.
Too much diversification can also dilute the return from high-quality holdings in your portfolio. 

Warren Buffett’s Biggest Holdings and Bets 

Warren Buffett’s Apple Stake

Buffett acquired 10 million shares of Apple in May 2016 through Berkshire Hathaway. Before this, Buffett was generally known for his aversion to technology companies. However, within a period of 4 years, he increased his stake to 245 million Apple shares, worth $95 Billion. This made him the company’s second-largest shareholder. However, the original stake just cost Berkshire about $35 Billion. Currently, though, Berkshire Hathaway’s stake in Apple has gone up an astounding $40 billion since March of this year. 

Buffett’s Stake in Japanese Trading Firms

In spite of the fact that the coronavirus had immense negative implications on world trade, Buffett went ahead and invested in 5 separate Japanese trading firms: Sumitomo, Mitsui, Itochu, Marubeni, and Mitsubishi. Berkshire Hathaway acquired these shares each representing a little over 5% of each of these firms over 12 months. 

Out of these, four companies have shown profits in the latest June financial quarter despite a dip in their yearly financial performance. The firm states that it will hold the shares on a long-term basis. 

Conclusion

People consider Warren Buffett’s investment advice very seriously. For newcomers in the investment space, following the investment wisdom as given by the American business tycoon can help them avoid a number of investing mistakes earlier on.


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