In trying times like these, I think keeping great investors like Warren Buffett and how they make money in mind is very important.
Us mere mortals can invest with the best intentions but can also be overcome with human foibles like emotional irrationality when the markets are in turmoil and our money is on the table. But investors like Buffett have made their billions by mastering their emotions and investing with conviction when it feels like the world is falling apart.
So what’s the greatest lesson we can learn from Buffett? In my opinion, it comes from merely looking at the kinds of companies he has in his portfolio – or the portfolio of his company Berkshire Hathaway to be more precise.
Currently, Berkshire’s largest position is Apple Inc. – a company I’m sure we are all quite familiar with. Other significant holdings include American Express, Coca-Cola, Amazon.com and General Motors.
From looking at these stocks, I see a common theme. Most of these companies are old companies (with the exception of Amazon) with strong brands and a dominant moat (which is what Buffett calls a long-term competitive advantage).
Buffett knows that markets have great times and terrible times (he did grow up during the Great Depression) and only selects companies he knows have what it takes to survive during the bleakest economic conditions.
People are still drinking Coca-Cola, buying stuff from Amazon and using their Amex cards to do so – even if they’re mostly stuck at home. That’s why Buffett has been able to consistently grow his wealth over the past 6 decades, despite all manner of economic problems that have cropped up during that time. What’s more, Buffett usually buys most of his shares during crises like the one we’re in.
So what can we take from this to our own ASX portfolios?
Choosing only the best companies with the best brands to invest in, and buying them when they’re cheap, that’s what.
I like to imagine my own holdings in 5, 10 or 20 years’ time and how they’re likely to be performing. As Buffett says, “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”.
So if you’re thinking about selling your shares because they’ve dropped in value, or buying something you don’t really like, just ask yourself ‘what would Warren do?’. You might find you have a change of heart!
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Sebastian Bowen owns shares of American Express and Coca-Cola. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.