Warren Buffett and his US$114 billion fortune are renowned among investors. Not only is the 'Oracle of Omaha' an incredibly successful stock picker, but he is also generous with his investing advice.
And while I generally find mountains of value in Buffett's liberally offered wisdom, there's one topic on which I wholeheartedly reject following his lead when investing on the ASX.
Here are two pieces of Buffett's investing advice I follow to the letter, and one that I ignore.
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2 pieces of Warren Buffett advice I live by
Number 1:
Buy a stock the way you would buy a house. Understand and like it such that you'd be content to own it in the absence of any market.
There are many Buffett quotes that portray a message similar to the one above. And for good reason, in my opinion.
As we absorb endlessly scrolling tickers and peruse dry fundamentals, it's easy to forget that investing on the stock market is, essentially, the same as buying chunks of businesses.
Buffett built much of his wealth by buying such chunks of quality businesses at decent prices and holding them as they grew.
That's the same long-term approach I aim to take when investing on the ASX.
Number 2:
Widespread fear is your friend as an investor, because it serves up bargain purchases.
The second piece of Buffett wisdom I aim to live by isn't always easy to follow. Fear is rarely a comfortable sensation to stomach, particularly when it seems like your hard-earned cash could be at stake.
But market corrections and bear markets are an almost unavoidable part of investing. And there's nearly always a silver lining when it comes to tough times on the market.
They often see shares in quality businesses tumble, creating an opportunity for bargain-hunting investors to 'buy the dip'. Without a little fear, such opportunities might never come knocking.
And the 1 piece of Warren Buffett advice I ignore:
We think diversification, as practiced generally, makes very little sense for anyone that knows what they're doing. Diversification is the protection against ignorance.
Now, I'd never go so far as to disagree with Buffett. It's clear he knows what he is doing when it comes to wealth building.
Not to mention, the above quote is often consumed without context, found within the accompanying video, wherein Buffett continues, "[diversification] is a perfectly sound approach for somebody who does not feel they know how to analyse businesses".
I don't doubt that the brains behind Berkshire Hathaway find little merit in diversification. However, it stands to reason that very few investors are as good at analysing businesses as Buffett has proven to be.
For the average investor, diversification offers protection against single-sector or -company downturns. By building a diverse portfolio, one might even boast a better chance of owning the market's next big thing.
Thus, I believe the majority of investors could benefit from building a diverse portfolio of ASX shares, and perhaps adding a few other asset classes for good measure.
