It can be easy to see Warren Buffett’s investing experience as different to our own. After all, he lived in what may now look like glory days of cheap valuations and little-known local gems.
In fact though, the vast majority of Buffett’s money has been made in the later part of his career. A lot of the approach he applies can be used even by a novice private investor on a tight budget.
Here are three great nuggets of investing wisdom from Buffett that I use myself.
1. Don’t bank on management alone, always look at the business model
Buffett has a lot to say about management. Like this: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.
From another angle, he said: “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will”.
Buffett attaches great importance to having the best management possible. Nonetheless, his thinking is clear: good management is a bonus and cannot always be expected in practice.
Investing in a business that can survive even bad management is the smart approach.
2. Invest for the long term
Buffett has said that his preferred holding time is “forever”. In practice, he does sometimes sell shares. But clearly, he buys into the approach of being a long-term investor.
His investment in Coca-Cola (NYSE: KO) helps illustrate the potential benefit. In seven years up to 1994, his firm spent $1.3bn buying shares in the soft drink maker. Now, it gets over half as much as that every year in dividends – and the stake’s value has ballooned to over $25bn.
The business model is excellent. Coca-Cola makes a proprietary syrup at low cost that it can sell at attractive profit margins, thanks in part to strong branding and a developed distribution network.
Over time, the benefit of marketing spend accumulates to build customer loyalty and the company could reap the commercial benefits for years, or even decades.
3. Pay attention to risks, not just rewards
Coca-Cola was already a long-established and successful business decades before Buffett invested. While there is a lot to like about it, it does face risks.
Consumer concerns about sugar’s impact on health remain a risk to revenues, while competition is growing from companies launching non-traditional soft drinks such as non-alcoholic gin substitutes.
Risk looms large in Buffett’s analytical approach to making investments (or not). As he said: “The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule”.
Of course, sometimes even Buffett loses money. But the point I think he is making here is that he spends a lot of time trying to weigh risks carefully. He focuses at least as much on what might go wrong if buying a particular share at a certain price as what may go right.
