Throughout my career, I have learned a lot from Warren Buffett (Trades, Portfolio), and I am still learning from the billionaire investor. Every time I read some of his advice, something new always springs to mind.
However, as I have developed and grown as an investor, I have realized that not all of his advice should be taken at face value. What’s more, I have also realized that not all of his advice is universal for all investors. I think this is one of the most significant issues investors have to confront when learning from great investors and fund managers. We should not take their advice at face value because our situations are not the same as theirs.
Instead, their advice should be understood and interpreted in the context of one’s own investment understanding and mentality. With that in mind, I wanted to pick out some of the Buffett lessons that I have learned over the years, that I have had to unlearn as my understanding of the investment world and my experience have grown.
I should clarify before I carry on that this article is not designed to attack Buffett or any of his advice. His advice is always relevant and sensible. This article is only designed to highlight how my understanding of the investment universe and my own style has developed over the years and how I have incorporated the Oracle of Omaha‘s advice into it along the way.
Gold vs. stocks
The most important piece of advice I have had to revisit is Buffett's advice on owning gold. The billionaire does not believe that owning gold provides any safety. He believes that stocks and shares are a much better alternative.
I have since learned that while equities are a much better investment than gold in the long-term, gold does have a place in my own portfolio. As an individual investor, I am not willing to risk all of my wealth all of the time.
Therefore, I have allocated a certain percentage to what I believe are more secure investments such as gold and short-term bonds. I am comfortable with this approach, and I think I would be uncomfortable without this additional layer of protection. It may not be sensible for all investors, but I have built it into my own strategy.
Avoiding debt
Buffett has also advised investors to stay away from debt. This is very sensible financial advice. Most investors should try to avoid debt, especially those who stand to lose everything if an investment they borrowed money for goes wrong.
However, Buffett himself does not actually avoid debt. He has borrowed significant amounts of money on many occasions in the past, even taking out a second mortgage to buy securities. I don’t think he would advocate this approach, but it is undeniable that he has done this in the past.
I don’t borrow a lot, but I have selectively used margin debt to take advantage of opportunities when they present themselves. I do not borrow a significant amount, and every time I do borrow it is only a small amount. Nevertheless, this approach has helped me build and diversify my portfolio over the years. Just like Buffett, I realize the risks but am occasionally willing and able to take those risks.
A marathon, not a sprint
The Oracle has also repeatedly stated that investors should not try and diversify their portfolios too much. They should concentrate on their favorite assets and hold these stocks forever.
This strategy does often produce results. I think it would be difficult to argue that a concentrated portfolio does not produce results considering the track records of some investors. However, these figures are distorted by survivorship bias. There are many concentrated portfolios that fail due to one spectacularly bad investment.
Thus, holding a highly concentrated portfolio is not an approach I am particularly comfortable with. In the past, I have managed a concentrated portfolio, but I couldn’t deal with the volatility.
Therefore, I adapted this Buffett advice. I have increased diversification in my portfolio to a level that I am comfortable with. When combined with the small allocation towards gold and fixed income, this diversification has reduced volatility in my portfolio. I have sacrificed some potential for capital gains, but I would rather sacrifice some gains to be more comfortable psychologically and reduce the risk of significant losses. After all, investing is a marathon, not a sprint.
Also check out:
