I’d use these steps from the Warren Buffett/Charlie Munger method today

Warren Buffett and Charlie Munger’s focus on industries they understand and their patient approach could be useful in today’s investing environment.

asx share price growth represented by hand holding hourglass surrounded by dollar signs

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Warren Buffett and Charlie Munger are two of the most successful and revered investors of all time. They have delivered market-beating returns on a consistent basis over a long period of time.

Although following their strategies may not guarantee high returns, it could have a positive impact on an investor’s portfolio in the long run.

As such, by focusing on industries that an investor understands, looking beyond short-term market movements and holding some cash, it may be possible to earn relatively attractive returns from equities.

Warren Buffett and Charlie Munger’s limited knowledge

Despite their track record of high returns, Warren Buffett and Charlie Munger do not invest in every industry available to them. In fact, many of their most successful investments over the years have been in the consumer goods and banking sectors. They have often overlooked technology businesses, as well as other sectors that many investors have profited from.

The main reason for this is that Buffett and Munger prefer to focus their capital on sectors that they fully understand and where they may have a competitive advantage versus other investors.

This may reduce the risk of their investments since they fully comprehend the potential threats that may be ahead. Similarly, it may mean higher return potential because they are able to identify the most appealing investments in an industry at a given point in time.

Although following a similar approach means that an investor may miss out on some attractive buying opportunities, the success of Warren Buffett and Charlie Munger shows that investors do not necessarily need to be experts in all industries to outperform the stock market.

Looking beyond short-term market movements

Warren Buffett and Charlie Munger also look beyond short-term market movements when investing. This allows them to avoid becoming too fearful in a market downturn, enabling them to buy stocks when other investors are selling them.

Equally, in a bull market, they rarely become excited about a stock market rally. This helps them avoid overpaying for shares when other investors allow their optimism to cloud their judgment.

By taking a long-term view, it is possible to capitalise on the stock market cycle more easily. It shows that gains and losses for the market have never previously lasted in perpetuity. By understanding this cycle and seeking to profit from it, it may be possible to earn higher returns in the long run.

Holding cash

Warren Buffett and Charlie Munger also hold relatively large amounts of cash at all times. They do not rely on its returns but rather use it to be able to respond quickly to short-term market movements that can create temporary buying opportunities. Holding some cash may also provide peace of mind during uncertain periods.

As the 2020 market crash showed, stock markets can recover quickly from their downturns. By being able to react quickly, it may be easier to take advantage of short-term mispricings.

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*Returns as of January 12th 2022

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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