One of the easiest ways to make an avoidable mistake is getting involved in investments that are overly complex.
“Never invest in a business you cannot understand.”Warren Buffett
There are too many opportunities out there to get hung up on studying a company or industry that is just not your strong suit. That is why Buffett has historically avoided investing in the technology sector.
Understanding the sector in which you will invest is crucial as the business quality is everything. While saying “no” to complicated businesses is straightforward, identifying high-quality businesses is much more challenging.
Warren Buffett’s investment philosophy is almost exclusive to buying high-quality companies with promising long-term opportunities for continuous growth.
Companies that earn high returns on the capital tied up in their business have the potential to compound their earnings faster than lower-returning businesses. As a result, the intrinsic value of these enterprises rises over time.
Which brings us to our next point: once a high-quality business has been purchased at a reasonable price, how long should it be held? Buffett embraces a buy-and-hold mentality. He has held some of his positions for a number of decades.
For one thing, it’s hard to find excellent businesses that continue to have a bright long-term future. On the other hand, quality businesses earn high returns and increase in value over time. Fundamentals can take years to impact a stock’s price, and only patient investors are rewarded.
Constantly buying and selling stocks eats away at returns in the form of taxes and trading commissions. Instead, we are generally better off to “buy right and sit tight.”
Trying to time the market, taking excessive risks, trading on emotions, venturing outside our circle of competence are all factors that hurt an investor’s performance.
Stock prices will swing with investor emotions, but that doesn’t mean a company’s future stream of cash flow has changed. Investors need to distinguish between price and value, concentrating their efforts on high-quality companies trading at the most reasonable prices today.
We often make investing harder than it needs to be. At The Agency, we make sure we build an agile business model that is customer-centric and future-proofed. This helps maintain, what Warren Buffett deems most important: company growth and longevity.
We can assist with your concept development needs and have a few clients with brilliant ideas that you could invest in too. Maybe check out what Oprah has to say about becoming successful?