Jae Jun, a long-time blog colleague of mine, wrote a great article in July I’ve been reading titled, The Warren Buffett Stock Strategy. I’ll let readers venture over for a read of their own but Jae expanded on the concept of a circle of competence in reference to the successes of Warren Buffett. As I’ve mentioned already in a post this August, there are a lot of lessons to be learned from Buffett’s techniques, approach and evolution of investing style that aren’t talked about as widely as you might expect. Reporters and investors far too often focus on what he bought and not why he bought a position.
Can Any Investor Replicate His Success?
No. I believe it’s unlikely over any comparable length of time. Buffett’s success is attributable to excellent stock selection and allocation of capital, but was also a product of the time in which those investments occurred. Today the world of investing has changed; quantity of information, speed of access and vehicles for financing are much different than 40 years ago.
I do believe strongly that an investor can pull important traits, qualities and characteristics from other successful investors in order to make their own unique and successful approach. I believe these tools are one reason why I’ve had so many visitors to this site over the years; returning readers want to build a toolbox.
Every investor should focus on building their toolbox and seeking to continuously improve the tools they place in it.
My toolbox consists of a mix of quantitative and qualitative tools, common sense, a focus on cost reduction and checks/balances to ensure I avoid behavioural tendencies such as market timing and emotional investing. I have always called this toolbox my Value Rules; a set of principles I’ve learnt, developed and continuously revisit in order to stay humble and focused.
Buffett says that it doesn’t matter the size of the circle of competence (whether large or small), but instead the importance is staying within that circle. This can simply be interpreted as Doing What You Do Best which I wrote about years ago after learning it in my early years of consulting and investing. My portfolio has exemplified his thought of buying the best of the best and allowing compounding returns to do what it’s intended to do. That’s why I focus so much on the cashflow component from my investments as much as annual returns.
Cashflow allows me to:
- Immediately reinvest those dividends in the same stock
- Reinvest them into another position that needs a higher allocation
- Build a cash position for a specific purchase or opportunity I’ve targeted
What other tools can you put in your toolbox? Read my Top Posts section!
What other tools would you like to read about? Leave a comment or join my mailing list!