Warren Buffett: A Simple Plan Is All You Need - Stockxpo - Grow more with Investors, Traders, Analyst and Research

Warren Buffett: A Simple Plan Is All You Need

Many investors fret about a range of topics when buying and selling shares. For example, they may worry about which strategy they should adopt when apportioning capital. Likewise, they may become concerned at how they divide their portfolio between different asset classes based on an ever-changing economic outlook.

This can lead to an inefficient capital allocation. Indeed, the time they spend worrying could be better used trying to unearth buying opportunities. In addition, investors who constantly fret about their portfolio may end up buying and selling shares more frequently as they overanalyze future risks facing their holdings. This could lead to greater costs that reduce returns over the long run.

Buffett’s strategy

By contrast, Berkshire Hathaway (

BRK.A, Financial) (BRK.B, Financial) chairman
Warren Buffett
(Trades, Portfolio) does not appear to worry unnecessarily about his holdings. Rather, he adopted a simple strategy that has been highly successful over recent decades. This was neatly summarized by the Oracle of Omaha when he said:

“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”

Clearly, this plan is likely to prove more difficult in practice than it is in theory. However, in my view, investors who aim to follow a simple strategy such as that laid out by Buffett could enjoy greater success in the long run. Additionally, it may help them to worry less about their holdings.

High-quality companies

Buffett’s simple strategy essentially has three key components. First, it focuses on identifying high-quality companies. One means to achieve this aim is to use a checklist that forces an investor to run through a range of fundamentals, such as debt levels, return on equity and the size of a company’s economic moat, before purchasing the stock.

One advantage of a checklist is that it helps to avoid companies that may not be of sufficient quality for purchase. However, it may also act as a support to individuals who have previously worried about investing by assuaging their concerns and providing a future reference that can be looked back on regarding the quality of a specific holding.

Valuation concerns

The second part of Buffett’s strategy is buying stocks at the right price. Clearly, valuing any asset is highly subjective, but investors who have a process for judging whether a stock is overvalued, undervalued or fairly valued may find they worry less about their holdings.

For example, if they have a set means of valuing a stock that encompasses a comparison to sector peers, historic levels and requires conservative assumptions about the future, they may have greater confidence in their decision-making ability. This may mean they have a greater chance of sticking with holdings – even if their share price is volatile, or falls, in the short run.

A long-term approach

The third part of Buffett’s simple strategy is to stick with high-quality companies for the long run. For some investors, this will entail a constant checking-up on holdings to see how they are performing quarter to quarter, or even week to week. However, Buffett has previously said he does not even concern himself with year-over-year performance. As he once said:

“Do not take yearly results too seriously. Instead, focus on four or five-year averages.”

In my opinion, all companies experience fluctuating performance from year to year. Therefore, it seems sensible to instead judge them on their performance over a longer timeframe. In doing so, an investor may worry less about short-term factors that are ultimately unlikely to make a significant difference to a stock’s return prospects. Instead, they may be better placed to identify the key factors that could affect investment returns over their long-term horizon.

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