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Investor Warren Buffett is widely recognised for his successful approach to picking shares. I think that by applying some Buffett moves I can hopefully improve my own investment returns and increase my wealth. Here is how.
Warren Buffett has low risk tolerance
One approach some investors take to building their wealth is investing in shares they think have high risks, but may offer high rewards.
Buffett is an expert at pricing risk thanks to his long experience of the insurance business. He takes risk very seriously. Indeed, his stated opinion is that “the CEO of any large financial organization must be the Chief Risk Officer as well”.
But when it comes to buying shares, what stands out about Buffett’s portfolio is that he tends to shun shares with high risk profiles. He typically sticks to fairly large, well-known firms with clear business models that sit firmly inside the economic mainstream. Similarly avoiding high-risk, high-reward shares could hopefully help me avoid costly mistakes that would eat into my wealth.
Admitting mistakes
One thing a lot of investors struggle to do is admit their mistakes, even to themselves. For example, when a share they own loses value, they may just hope blindly for a price recovery without really analysing their investment thesis and trying to see if they had previously missed an important factor.
All investors make mistakes. But they differ in how they respond to them. I think that matters because losing money makes it harder to build my wealth. As Warren Buffett says: “Rule number one: never lose money. Rule number two: never forget rule number one”.
The first step to moving on from a mistake and limiting its potential for further damaging a portfolio is admitting it. Buffett does this frequently. In this year’s Berkshire Hathaway shareholders’ letter, the Sage of Omaha wrote, “I make many mistakes”. I think admitting mistakes to myself the way Buffett does could help me limit their cost and build my wealth.
Waiting for great opportunities
When people want to do something, whether it is buy a car or build their wealth, they commonly take the first decent opportunity that comes along. Often they may think that this is just a stopgap until something better comes along and they can trade up. But tying up money in that way can have an opportunity cost. When a truly great opportunity comes along, they may not be able to take advantage of it.
That is why Buffett keeps a lot of cash in bonds that have very low interest rates. By doing that, he misses out on the dividends he could likely earn by parking the money in dividend shares until a great opportunity comes along. But it means he is ready to act immediately when a great investment opportunity does present itself, as he has not tied up his money and can access it immediately.
That takes patience. Warren Buffett sometimes waits years to make a move on a share. But over the long term, waiting and investing in a share with returns high above average could make me wealthier than investing sooner in a share that had returns only slightly above average.
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