Warren Buffett did not become a multi-billionaire for no reason.
The Sage of Omaha has spent decades investing and building his wealth, learning many lessons along the way. Fortunately for other investors, he has been willing to share many of those lessons for free.
As a private investor with limited mean, it can be easy to look at a billionaire and think they operate in a different universe.
In fact, though, one reason so many investors talk about Warren Buffett is that some of the lessons from his long investing career can be relevant for investors even on a very small budget.
Here are three of the ideas Buffett uses that I apply even when investing just a small amount.
Knowing what you know — and sticking to it
Warren Buffett has repeatedly talked about the importance of staying inside one’s circle of competence as an investor.
His point is that it does not matter how wide or narrow that circle is, but that staying inside it makes it more likely that one has the necessary knowledge to assess a possible investment.
Doing otherwise – putting money into something you do not understand – is not investing but mere speculating, in my opinion.
Focus on long-term competitive advantage
Businesses come and businesses go. Some, however, are here for the long run.
It can be hard to tell in advance what businesses might stick around and do well. When trying to do so, Warren Buffett looks for a competitive advantage or what he calls a ‘moat’ (because it can help fend off rivals in the way a moat at a medieval castle could help see off possible invaders).
To see this concept in action, consider his investment in Coca-Cola (NYSE: KO).
It operates in a market where demand is large and likely to stay that way. People will always be thirsty and want to quench their thirst.
But, as with many markets where there is large demand, there is also significant competition.
So Coca-Cola has spent decades building and reinforcing a series of competitive advantages. Its brand, supported by heavy advertising, is one. A proprietary formula for its flagship product is another.
But Coca-Cola’s moat runs deeper than just brand and product. Global reach gives it economies of scale, while its extensive distribution and bottling system would be difficult if not impossible for rivals to replicate.
Buffett is a smart enough investor always to consider risks as well as possible rewards. Coca-Cola’s product portfolio could see waning demand as health-conscious consumers switch away from sugary drinks.
But that is part of the point of competitive advantages: they can hopefully help a company navigate even a risky environment and do well.
Keeping emotions in their place
Buffett uses emotional language, often talking about businesses he loves.
But when push comes to shove, the billionaire investor has repeatedly proven himself willing to make tough, rational business decisions.
His focus as an investor is building wealth and that can mean making tough decisions. Emotionally, that can feel difficult – but necessary.
