How To Adopt a Long-Term Approach to Investing, Like Warren Buffett Does
It’s said that patience is a virtue, and we see this truth shine often, especially in the realm of personal finance.
Just look at Warren Buffett. Among his most famous and respected philosophical approaches to wealth building is investing for the long haul. This means not bailing on stocks just because of market turbulence or ditching a real estate investment when the housing market takes a hit.
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Keep in mind, however, that Buffett doesn’t always hold to this tenet; for example, he’s not in favor when an investment isn’t built on a sound foundation or guided by excellent leadership.
“Buffett’s approach to investing focuses on investing in companies with ‘good business’ — sustainable and uncomplicated businesses with solid management teams,” said Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group. “Companies that can generate enough profits to return funds to shareholders in the form of dividends. Buffett also likes companies with deep ‘moats’ or competitive advantages, so companies that rise above their competition fit this style.”
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Why Investing Long Term Is a Smart Approach
Before we get into the ways you can adopt a long-term approach to investing like Warren Buffett does, let’s explore why this method is best for your wealth-building goals.
“Investing for the long term is the only way you can make money from data and analysis and [applying] your only two assets that matter: your brain and hard work,” said Eldad Tamir, founder and CEO at FINQ.
“Buffett’s approach acknowledges that, while markets can be efficient in the long run, they often misprice securities in the short term, creating opportunities for informed investors,” Tamir said. “In addition, investing with a margin of safety and focusing on intrinsic value prevents downside risk. But most importantly, this philosophy advocates for making decisions based on rational analysis rather than emotional reactions to market volatility.”
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Limit Your Investments
When diving into investing, be discerning and narrow down the amount of investments you’ll keep.
“Treat your portfolio as though it has a total of 10 units/positions, and you’re only allowed to make 20 investments,” said Kai Sato, general partner at Mauloa. “This forces you to be highly selective and concentrated.
Referencing Charlie Munger, the late vice chairman of Berkshire Hathaway, Buffett’s investing company, Sato said, “Within those parameters, you’re simply trying to generate funds at 3% and invest them at 13%.”
Assess Value Proposition
To successfully implement a long-haul approach to investing, you need to have solid insights into its value trajectory. Research and reflect on whether a stock will go up or down in worth over time. This doesn’t mean telling the future; it means working with what information is available to you and using good judgment.
“When wanting to buy something, think about if its value is going to increase or decrease in time,” said Paul Heys, a financial advisor at Investorship. “Looking at the long-term effects of a purchase will help decide whether a current purchase will increase your wealth in the future.”
Compare Your Performance to the S&P 500 in 5-Year Increments
Sato quotes Buffett himself for this next tip on successfully taking a long-term approach to investing.
“While I much prefer a five-year test, I feel three years is an absolute minimum for judging performance,” Sato said. “It is a certainty that we will have years when the partnership performance is poorer, perhaps substantially so, than the Dow. If any three-year or longer period produces poor results, we all should start looking around for other places to have our money. An exception to the latter statement would be three years covering a speculative explosion in a bull market.”
Don’t Panic When the Market Gets Rocky
It is the inherent nature of investments — particularly the stock market — to fluctuate, meaning that sometimes you’ll see dips in your holdings. This is normal — and generally you shouldn’t panic.
“It’s important to remember that market fluctuations are normal and temporary and to continue to trust in the strength and resilience of the companies you’ve invested in,” Tamir said. “You also want to avoid constantly watching the market because doing this can lead to emotional decision making. Warren Buffett’s investment philosophy is as much about mindset as it is about strategy.”
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