Most, if not all investors, should know Warren Buffett.
He is arguably the world’s most successful investor, with an enviable track record stretching for over 50 years.
During this time, he managed to compound his wealth by an impressive 20% per year.
Known fondly as the “Oracle of Omaha”, Buffett can distil excellent investment advice in the form of easy-to-understand nuggets of wisdom.
His folksy demeanour and simple living belie a sharp intellect and an analytical mind.
You may believe it’s almost impossible to replicate his enormous success.
After all, Buffett has copious amounts of money, status and connections.
However, the fact is that many of Buffett’s techniques are simple enough to follow.
He has the patience, fortitude and perseverance to see his investments through, thus achieving great success.
Here are three simple yet effective techniques you can use to invest just like the Oracle.
View stocks as part of a business
Rising or falling share prices often become talking points among investors.
But amid all the talk, you have to remember that owning a share represents part-ownership in a business.
That’s how Buffett views his investments, rather than treating them as a piece of inventory to be bought and sold at a whim.
Too many investors make the mistake of viewing stocks as merely numbers moving up and down.
What you need to remember is that each stock represents a fraction of a real-life business that is selling products and services used by people or other businesses.
Over the long haul, if the business does well, the stock will follow as its fundamental value relies on the profits and cash flow generated.
By treating shares as part-ownership of a living, breathing business, you can better appreciate how share prices derive their value.
Buy and hold
One of the open secrets underlying Buffett’s success is not just the fact that he picks great companies to invest in.
It’s that he can continue holding on to these great investments, thereby letting them compound his wealth many times over.
Two examples come to mind that help to illustrate this amazing feat.
Buffett had significant stakes in both Coca-Cola (NYSE: KO) and American Express Inc (NYSE: AXP).
Coca-Cola is one of the largest beverage companies in the world and distributes its products globally, while American Express is one of the leading credit and debit card companies in the world.
$1 invested in Coca-Cola at the beginning of 1990 would be worth $15.25 by the end of 2015. The company had compounded the $1 by 11.5% per year (including dividends) over 25 years.
Meanwhile, American Express’s share price grew from US$2.25 to US$96.3 in 40 years, for a compound annual growth rate of close to 10%.
Such impressive results would NOT have been achievable if the shares were sold off for a quick gain.
The result is clear.
If you want to enjoy amazing returns, you need to have the patience to hold on to your winners over the long-term.
Avoid hype
Buying great companies is only one aspect of investing.
The other is avoiding lousy investments that will turn out to be lemons many years on.
Although you may enjoy decent compounding at one end, you will also be losing money on the other.
An effective method to avoid losing money is to avoid hyped-up stocks.
Buffett was ridiculed for standing firm and refusing to invest in dot.com stocks near the turn of the century.
These stocks had no profits or a viable business plan and were going to market simply based on hot air and empty promises
He was eventually vindicated when these high-flying stocks crashed in a bear market that lasted from 2000 till 2002.
During this COVID-19 pandemic, you may have witnessed shares of pharmaceutical companies soaring as they announce early-stage success for potential vaccines.
Many companies are channelling resources and manpower to develop a workable vaccine in a race to be the first to put an end to this debilitating pandemic.
It may be prudent to hold off and see who emerges in the lead before committing your capital as the sector is now significantly hyped up.
Get Smart: It’s not so hard
The good news is that it’s not too hard to follow the three Buffett principles above.
However, while they are easy to understand, they are not simple to master.
These techniques require patience and mental discipline on your part.
These attributes need time to cultivate, but the rewards are well worth it!
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
Photo source: Modified from Warren Buffett Caricature by DonkeyHotey under Creative Commons 2.0.