Warren Buffett is widely considered to be the world’s greatest investor. And he did not get there by accident.
Over the past eight decades, he has developed and followed a strict set of rules, which have enabled him to navigate different market environments and prevent significant losses. I am following some of these rules in my own investing journey.
There are three critical Buffett rules I believe have been instrumental in helping me navigate to different market environments over the past couple of years.
Warren Buffett rules
The first is to only invest in companies that have substantial competitive advantages. These corporations can navigate challenging environments better than peers without such advantages. For example, a company with pricing power will be able to put up prices if costs rise significantly. Not all businesses have these advantages.
Another Buffett tip I have incorporated into my investment style is to avoid businesses with weak balance sheets. Companies that take on a lot of debt can look clever, but the story can unwind quickly if interest rates rise significantly or profits fall.
The easiest way to get around this issue is to avoid indebted companies altogether.
The third piece of advice I have learned from the billionaire investor is to focus on the long term.
Keeping an eye on share prices on a daily basis does not really do anything to improve investment returns. But it can have a significant psychological impact. Instead of watching the market daily, I take a long-term view and assess how a company will perform over the next few years.
High-quality companies
One of my favourite investments in the current market is the utility company National Grid. This ticks all of the boxes of a potential Buffett investment. I would buy the stock for my portfolio as a long-term buy.
It has a solid competitive advantage because it owns most of the electricity infrastructure in England. It also has a robust balance sheet. These qualities should help the business navigate whatever the world throws at it over the next five to 10 years.
That said, it is likely to face some regulatory challenges. Additional regulations are probably the most significant risks to National Grid’s growth as we advance.
Another company I believe ticks all of the boxes of a potential Buffett investment is the distribution group Bunzl. This business has strong economies of scale, which act as a substantial competitive advantage.
It also has a robust balance sheet. What’s more, the distribution industry is not going anywhere any time soon. That implies the company has tremendous potential over the next couple of years to capitalise on the industry’s growth.
Some challenges it could face are competitive forces and additional costs, which could impact its razor-thin profit margins.
Despite these headwinds, I would buy the company for my portfolio as I believe it is the perfect Buffett-style investment I like to acquire.
The post 3 Warren Buffett lessons I’m following to build wealth appeared first on The Motley Fool UK.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl. 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.
