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Understanding Warren Buffett’s philosophy to long-term investment success

October 2, 2019

October 2, 2019

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Understanding Warren Buffett’s philosophy to long-term investment success

Warren Buffett, CEO & Chairman of Berkshire Hathaway, is considered one of the most successful investors of our time. Like many extraordinary people, Buffett’s world view and approach to investing, and life in general, is radical yet effective. His methods may seem counterintuitive, but have resulted in Berkshire Hathaway outperforming the markets considerably and consistently since 1965. 

Warren Buffett, CEO & Chairman of Berkshire Hathaway, is considered one of the most successful investors of our time. Like many extraordinary people, Buffett’s world view and approach to investing, and life in general, is radical yet effective. His methods may seem counterintuitive, but have resulted in Berkshire Hathaway outperforming the markets considerably and consistently since 1965. 

One of Buffett’s most famous quotes is “to be greedy when others are fearful and fearful when others are greedy”. When things go well for investors, it’s hard to snap out of the rush and think long-term, yet this is what Buffet strives to do. Likewise, when fear grips the market, it’s time to roll out investments. 

While this quote is well known, it is not the only approach that has propelled Buffett’s Berkshire Hathaway forward. Buffett has also built his success on other similar simplistic rules, thinking long-term and striving for minimalism rather than over-complicating matters. He lives in a relatively modest house and has no computer or smartphone in his office. He spends 80% of his time reading and believes that spending time with people who are smarter than you is essential. 

The key is focus – focus to really see what’s important and scrap everything else. 

His focus extends to the way he invests, only making a handful of quality investments a year. In ‘The Outsiders’, William Thorndike explains the logic of this approach: 

“Buffett believes that exceptional returns come from concentrated portfolios, that excellent investment ideas are rare, and he has repeatedly told students that their investing results would improve if at the beginning of their careers, they were handed a twenty-hole punch card representing the total number of investments they could make in their investing lifetimes. As he summarized in the 1993 annual report, ‘We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it.”

According to Warren Buffett, investing is a waiting game, letting pitch after pitch pass by until the right one comes along. All the while ignoring the social pressure to invest more. 

When Buffett does invest, it’s usually for the long term too. On average, he held his top five stock options for more than twenty years, an incredibly low level of activity that is rarely seen anywhere else – a typical mutual fund holds for less than a year on average – but has resulted in an impressive track record for Buffett’s Berkshire Hathaway. 

Long-term thinking, just like focus, is an approach to investing as well as life in general that many high performers utilise. Time invested in long term payoff makes sense on paper but it can seem counterintuitive in day-to-day business. The busier you are, and the more responsibility you have, the less perceived time there is for anything but daily tasks. However high-performers find a way of stepping away from the daily rat-race and invest in cumulative knowledge. 

Buffett is a believer in this concept. So instead of learning something that will become obsolete in a few years, he prefers to learn something that will make him smarter over the longer term. A good example is a specific technology versus reading. A technology will quickly become out of date, whereas a general understanding of the world around us never will. 

As Ben Franklin once said, “an investment in knowledge pays the best interest.”

With this approach of focus and long-term planning, Buffett has built his hugely successful company Berkshire Hathaway which has continued to outperform consistently through the years. Excitingly, we will soon have an investment opportunity in Berkshire Hathaway. Click here to request the PDS.  

 

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