The past success of investors such as Warren Buffett means that they can offer worthwhile views on where to invest today in what is an increasingly uncertain stock market.
While risks are high, and there is an ongoing potential for a market crash, Buffett’s long-term approach to investing could lead to high returns.
Similarly, his focus on investing in industries he understands could be worth mirroring within your own portfolio.
Warren Buffett’s holding period
While many investors may be trying to work out whether a second market crash will occur, or if there will be a market rally, Warren Buffett has always adopted a long-term view when it comes to investing. This means that the short-term performance of an investment portfolio is unlikely to be of great significance – as long as it offers high total returns in the long run.
The past performance of the stock market suggests that this strategy could be sound. After all, the best buying opportunities are often found when investors feel that the risks facing the world economy and the stock market are at their highest level. In such a scenario, the stock market may have already priced in those risks, which can lead to wide margins of safety being on offer for high-quality stocks.
Investing in what you know
It’s easy for any investor to buy a wide range of stocks in multiple industries to try and diversify. However, this may mean that you do not have a sufficiently large understanding of those industries to identify the best companies at the most attractive prices.
Therefore, following Warren Buffett in terms of investing in sectors that you understand could be a good idea. He has focused his capital on a relatively small number of industries, and has been able to identify the most attractive companies within them.
This point may be especially relevant at the present time. Many sectors are undergoing periods of rapid change that could provide opportunities for disruptive business models, as well as difficult futures for existing companies. Through learning about the intricacies of a specific industry, you may stand a better chance of investing in those businesses with long-term growth potential.
Focusing on equities
Warren Buffett has invested the vast majority of his wealth in equities. Although the recent market crash may make other assets such as gold and Bitcoin more attractive in the eyes of some investors, the track record of the stock market suggests that it offers the most attractive risk/reward ratio of mainstream assets.
With stock prices being exceptionally low in some industries right now, there may be opportunities to obtain market-beating returns in the coming years. Investing now could improve your financial prospects, and allow you to enjoy greater financial freedom in the long run.
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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. 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.
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