As well as being one of the most successful investors of all time, Warren Buffett is also one of the easiest for private investors to follow. He does not appear to employ strategies which are particularly complex. Therefore, many of his methods can be followed by a range of investors and could help to improve their overall portfolio returns.
Knowledge is power
One area in which Warren Buffett excels is sticking to what he knows. If he does not understand a business or its operations he avoids it in favour of those companies and sectors he does have knowledge about. For example, while he has an investment in IBM, he has never been particularly focused on new technology. Rather, he has chosen to focus on consumer goods companies, banks and other specific areas where he feels he can add value.
This could be an important takeaway for investors. It is extremely difficult to be an expert on a wide variety of sectors and/or companies. However, that is not necessary according to Buffett's philosophy. Knowing a lot about a few companies could be all it takes to generate a seven-figure portfolio. Therefore, investors may be better served by focusing on specific industries in future.
Warren Buffett famously said that all investors should only make 20 investments in their careers. His rationale for such a small number is that it would cause someone to think long and hard before buying any stock. It is all too easy to dabble in a variety of companies without undertaking sufficient research, according to Buffett. Therefore, if an investor knew they had limited opportunities to place their cash, they may take more care over where they choose to invest their hard-earned money.
While 20 investments may be on the low side, the point is that making a million does not require investors to make a large number of correct decisions. They need to only get the big decisions right when it comes to where their portfolios are invested. And by limiting buying and selling activity, it may cause investors to only choose what they feel are their best ideas. These are likely to be the ones that generate the highest returns in the long run.
One area in which Warren Buffett may surprise other investors is his attitude towards cash. For someone who has been so successful in buying shares in recent decades, he remains very positive on the use of cash within a portfolio. This is not only so that an investor can take advantage of potential buying opportunities, but also because it can provide peace of mind in difficult periods for the stock market. This may help us to remain rational during bear markets, when the best opportunities may present themselves.
Clearly, finding new opportunities is never easy. But by focusing on a small number of industries and making sure stocks in a portfolio are the best ideas at that time, investors could generate higher returns - just as Warren Buffett has done during his career.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.