3 smart Warren Buffett investing rules I follow

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Becoming a billionaire through smart stock purchases is possible – but few investors manage it. One who has is Warren Buffett.

Although my resources are no match for his, some of the approaches Buffett takes to investing could actually work equally well for me.

Here are a trio of investing techniques used by Buffett that I hope can also help enhance my long-term investing results.

Buy into strong businesses

Many investors focus just on share prices. For example, they may zoom in on a share because its price has halved, or it gives an unusually low price-to-earnings ratio.

Such considerations can certainly have a role when I think about whether I ought to buy into a share. But I never purchase purely on that basis. Instead, I am looking to buy into great businesses at attractive prices.

That is the approach Buffett takes. He looks at a share as a piece of a business. If he does not like the overall business, he would not buy a share, no matter how cheap the price seemed.

Hold for the long term

Buying into quality businesses at the right price has the advantage that, over time, a shareholding hopefully ought to increase in value. Buffett’s stakes in companies like Coca-Cola and Apple have been massively rewarding for him.

That helps explain why he is a believer in long-term investing. Indeed, he has said that if an investor is not willing to hold a share for 10 years, he should not consider owning it for even 10 minutes.

But even Buffett makes mistakes. So no matter how much he might believe in an idea like buying Apple shares, his portfolio is always diversified across a range of companies.

Stick to simple ideas

One of the things that may be surprising given the enormous investing success enjoyed by Buffett is that most of his shareholdings are in large, well-known companies that have been around for decades.

A common myth about the stock market is that it is important for an investor to uncover little-known companies that will become huge in future. That is one approach that can work. But it is also possible to do what Buffett has done, namely investing in well-known companies with business models that are easy to understand and analyse.

That is why Buffett emphasises the importance of staying inside a circle of competence. He sticks to a fairly small number of industries he understands very well. Keeping that focus makes it easier to become more expert in those areas over the years. That could help me to assess potential investments.

Invest like Buffett

Buffett’s circle of competence is different to my own. What works for him might not work for me. But there are some elements of the Buffett approach to investing that I think could help me as I hunt for opportunities to build long-term wealth.

The post 3 smart Warren Buffett investing rules I follow appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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