It's easy to find dozens of insightful quotes from Warren Buffett over the years. When you look at annual meetings, shareholder events, interviews, and reports, Buffett has given investors many words of wisdom to help guide them to make smarter investing decisions.
I'm going to sum up the most important parts of all that in just two words: "fat pitch." In the past, Buffett and the late Charlie Munger have talked about the importance of waiting for the fat pitch, as a hitter might in baseball. And if you do, it can set you up for great returns and keep your risk low.
Image source: Getty Images.
Why these two words cover Buffett's most powerful insights
The fat-pitch strategy relates to picking your spots as an investor and not straying from what you know. Doing so could result in getting into risky investments. Buffett often stays within what he considers to be his "circle of competence" -- sectors and industries that he knows well.
That's why you'll see many consumer goods, oil and gas, and financial companies at the top of Berkshire Hathaway's portfolio, as these are the companies Buffett knows best. There are tech and other stocks in Berkshire's portfolio that make up smaller positions because Buffett isn't the only person who makes purchases for the company. However, when he's bullish on a company, he knows the business inside and out.
The concept of a fat pitch, particularly in baseball, can help underscore another important Buffett tip over the years -- and that's to take time and wait for the right opportunity. This means buying when valuations are low and others are fearful.
Waiting for that fat pitch to come within your zone and then taking a big swing could result in a strong, low-risk investment that has the potential to become much more valuable in the future. Not only can the upside be significant, but you avoid taking on much risk.
Buffett recently deployed this strategy
Earlier this year, Buffett bought shares of health insurance giant UnitedHealth Group (UNH 0.93%) as it was tumbling in value. It was a move that fits right within his wheelhouse, as Buffett loves insurance businesses. When you combine that with a beaten-down valuation and plenty of bad news weighing down the stock, Buffett likely saw an opportunity -- or a fat pitch -- that was too good to pass up.
NYSE: UNH
Key Data Points
It was a move I saw coming because it seemed like a perfect opportunity for Buffett, with the healthcare stock being right within his circle of competence.
While UnitedHealth has been facing many headwinds of late, including a change in CEO, investigations into its billing practices, and rising costs, those are all temporary issues. Over time, they will pass, and the healthcare company should rebound and prove to investors that it's a good buy again.
When there's a flurry of bad news, it can send a stock into a seemingly endless tailspin. But buying during that weakness can set an investor up for massive returns down the road. As long as the company's fundamentals are strong and it's a quality business, a sharp decline in value could make for a fantastic investing opportunity.
Before buying a stock, think about whether it's a fat pitch
If you remember these two words before you buy a stock, they can help you consider whether it's truly a good buying opportunity and a company in your zone or if you're investing for other, riskier reasons. Not every fat pitch will result in a home run and be a massive return for your portfolio, but by focusing on these types of opportunities, you can make better and smarter investment decisions that can pay off in the long run.
