Warren Buffett, also known as the ‘Oracle of Omaha’ and arguably one of the most successful investors of the modern era, has over the years revealed some of his key insights in terms of what makes for a good investment.
Amongst these are to operate in what he calls an individual investor’s ‘circle of competence’. In other words, investors need to understand how a business operates, how it makes money and the future sustainability of its business model before deciding to invest in it.
Another key insight of Buffett’s is to remember that you are buying a share in a business. As a part owner of that business you should not be concerned about short-term share price fluctuations or volatility as this is merely temporary noise that should be ignored by long-term investors.
A third rule is to buy stocks with a large ‘margin of safety’. These are investments that currently sell significantly below their intrinsic value. Accurately estimating this intrinsic value requires a rigorous fundamental analysis of the business, the sector it operates in and the impact of the general state of the economy on the business.
These are all seemingly obvious insights. Significantly, high net worth individuals typically don’t have a secret investment formula that they follow. Rather, they tend to understand what investment mistakes to avoid as well as how to make money work for them and when to take calculated risks.
Here are my top tips of investing mistakes to avoid.
Diversify your portfolio to include an offshore component
High net worth individuals know the value of diversifying their portfolio’s beyond their home markets. This is particularly important in South Africa which has a small local equity market relative to global markets in more developed economies. In addition to its size, the local equity market does not adequately represent a broad enough range of companies required of a globally diversified portfolio. Offshore investments provide a degree of protection against poor local economic policy and a volatile currency.
Invest in both tangible and intangible assets
Although equities and bonds are typically the first investments that come to mind, it’s just as important to have some tangible assets such as private and commercial real estate, gold and even art. Alternative investments – an investment category which includes real estate, private equity, private debt, venture capital and infrastructure investments, amongst others, is becoming an increasingly attractive option for investors looking to diversify away from the traditional listed investment market. These type of investments often have lock-in periods of between two and 10 years. To compensate for this lack of liquidity they often provide higher returns and less volatility compared to more liquid investments.
Private equity and venture capital are predicted to become the largest alternative asset classes with assets under management estimated to be in excess of $11 trillion by 2026, according to Preqin’s 2022 Global Alternatives Report. Although appetite for alternatives in South Africa lags global markets, this is expected to grow given that they offer a good counterbalance to stocks, access to opportunities not available in the traditional investment space, and can potentially help shield a portfolio from the shocks of traditional markets.
Sticking to personal investment goals
High net worth individuals understand the value of setting their own personal investment goals and then sticking to these goals for the long term. This means they stay the course and remain invested even when markets go through the inevitable downturn. They’re not tempted to liquidate their investments to indulge the latest must-have item but instead understand the benefit of compound interest. Neither do they obsessively watch the markets and react emotionally to market movements. Instead, they hold on to their investments for as long as possible in order to maximise their returns.
Avoiding investment trends
High net worth individuals understand the dangers of chasing investment trends or following suspect advice from social media. Instead, they do their due diligence before deciding where to invest.
Having a savings strategy in place
High net worth individuals understand the necessity of investing wisely coupled with a savings strategy. They live within their means, ensure their debt levels are manageable and save sufficiently.
Remove the emotion
High net worth individuals understand the need to remove emotion from their investment decisions. While they don’t make knee-jerk decisions, neither do they remain invested in a company where the underlying fundamentals have changed. They don’t allow fear or greed to control their decisions and understand the value of patience.
Mistakes – as even Buffett will attest to – are part of the investing process. However, knowing what they are and avoiding them where possible will limit your investment failures.
| This article "Mistakes wealthy investors don't make" was published 4 April 2022 on page 13 in The Herald.