Warren Buffett's seemingly simple approach to capital allocation has worked extremely well. This is evident in Berkshire Hathaway's impressive decades-long track record. A $10,000 investment in the conglomerate 50 years ago would be worth an astonishing $18.6 million today (as of Dec. 4).
Naturally, many individual investors look to the Oracle of Omaha for ways to improve their own skills when actively managing a portfolio. The good news is that anyone can benefit from one of Buffett's biggest advantages.
Here's what I think is the secret to his investing success.
Play a different game
In my opinion, the average investor needs to do one thing above all else to increase his or her chances of generating outsize returns in the stock market: adopt a long-term mindset. In other words, it's best to look out over the next five years (or more) when making investment decisions.
There is less competition when you focus this far out. In the 1950s, the average holding period for a stock was eight years. Nowadays, it's measured in months.
The advent of the internet and smartphones that facilitate 24/7 connectivity, coupled with a never-ending financial news cycle, support shorter time horizons for investors. Plus, services like Robinhood, which gamify investing, encourage frequent trading.
To be clear, it's impossible to predict what direction a stock is heading in over the next month, quarter, or even year. An unlimited number of factors affect investor sentiment.
Not only that, but the average investor will also have to go up against deep-pocketed billion-dollar hedge funds that have huge technology and research budgets to try to predict price movements. This is a losing proposition. It's smart to avoid getting sucked into this.
Buffett is OK with buying businesses that other investors aren't drawn to at the moment. His belief in the companies he buys is that over a five- or 10-year period, they will perform well. And the market will eventually price them accordingly. So having patience is a huge advantage in the market these days.
Image source: Getty Images.
Focus on what matters
Adopting a long-term mindset ensures that investors focus their attention on the stuff that really matters. These are the fundamentals of a business. Strong performance in this regard should eventually be reflected in the stock price.
Buffett looks for companies that have an economic moat, or a set of traits that keep rival firms in an industry at bay. And he thinks like a business owner, not a stock picker.
Moreover, Buffett prioritizes other qualitative factors, like a solid customer value proposition, a strong management team, and growth prospects. A company that has these increases its chances of lasting success in a competitive world.
Just look at Berkshire's largest holding, Apple. The iPhone maker possesses all these characteristics. This helps explain why the stock has trounced the market, up 309% in the past five years.
It might be difficult to do at times, but investors should ignore the noise, avoid the urge to constantly make trades, and keep their eyes on the long term. This will ensure that the focus will always be on the things that truly matter for a business and a stock to perform well over time.
Buffett certainly operates this way. And when it comes to your investments, you should consider doing so as well.
