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Image source: The Motley Fool
Just a few days before the Stocks and Shares ISA window closes, I’m keen to shelter as much money from the taxman as possible. But, then, how to increase that wealth? For me the answer is simple: use the Warren Buffett method.
Invest to build wealth
It’s that time of year again, where I have to remind myself to invest every spare pound I have into a Stocks and Shares ISA. The equation is simple: use it, or lose it.
At the beginning of each month, I save a small portion of my salary with the intention of spending it on the stock market.
When making money, I always remember Buffett’s first rule of investing: don’t lose. The easiest way to do this is to buy stocks that are trading lower than they are worth. For me, that means leaving cash on the sidelines ready to deploy when my watch list is ticked off.
Temperament over intellect
In the era of commission-free trading and unlimited sources of information, investing can be complicated and require a large IQ.
If I type ‘stocks to buy’ in Google, it brings up almost 4bn results! Every day investors are bombarded with hot stock picks through channels such as social media forums.
Buffett’s approach is different. For him, the most attractive quality of an investor is a stable personality. Such a person”there is no great pleasure in being in the crowd or against the crowd“.
Investing is about thinking. Investors may be right because the facts and reasons are right, not because others agree or disagree with them.
Always be patient
One of the hardest things for an investor like me is… absolutely nothing (in terms of buying and selling, that is). Why? Because it’s boring. For professional money managers whose careers depend on beating their benchmarks, doing nothing is simply not an option.
However, Buffett has shown that successful investors do not need to be active traders in the market. Instead, he spends the whole day analyzing the company’s accounts and reading a lot. He uses the knowledge he has acquired to value the business.
Circle of competence
Buffett once said: “I don’t have to make money in every game.” In this context, he specifically talked about the downside of technology-related stocks. today, Apple may be Berkshire Hathaway‘s largest holding, but for decades of corporate holdings Buffett has never held a technology stock.
The reason for the lack of exposure in the technology space is that they do not understand the business model and, by extension, how to value it.
Every day slices of thousands of publicly traded companies are available to investors at constantly changing prices. Buffett likened this to a baseball game where the pitcher would throw the ball. Unlike baseball, however, it doesn’t force me to take a swing.
This is the kind of thinking that I use when thinking about investing – I will only swing if the business is within my scope of competence and I am sure that the price offered is lower than its intrinsic value.
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