Warren Buffett is one of the most successful investors of all time, and I think there's plenty we can learn from his approach to investing.
What I like about his philosophy is that you don't need to be a financial expert or spend hours studying share price charts to apply it.
In fact, some of his best lessons are surprisingly simple. And I believe following them could help Australian investors make better decisions and build wealth over the long term.
Here's what I'd take from Buffett's approach.
Invest in ASX shares you understand
One of Buffett's best-known principles is staying within your circle of competence.
For me, that means understanding how a company makes money, why customers choose its products or services, and what could threaten its future profits.
Take REA Group Ltd (ASX: REA), for example. Its property websites have become an important part of how Australians buy and sell homes.
I can understand why real estate agents are willing to pay to advertise on its platforms, and why having such a large audience provides a competitive advantage.
I think that's the sort of business worth investigating further. And if I can't confidently explain how a company makes money or what makes it successful, I'm happy to look elsewhere.
Quality is important, but so is the price
Buffett famously argued that buying a wonderful company at a fair price is better than buying an ordinary company at a bargain price.
I think that's excellent advice for ASX investors.
Consider Wesfarmers Ltd (ASX: WES). Its Bunnings and Kmart businesses have strong competitive positions, loyal customers, and opportunities to continue growing earnings over time. Those are qualities I'd happily pay a premium for.
However, even an excellent business can deliver disappointing investment returns if its shares are purchased at an excessive valuation.
That's why I think it's important to consider how much a company could earn in five or ten years and whether today's share price offers a reasonable return on that growth.
Make volatility work for you
Another lesson I've taken from Buffett is that share price movements can create opportunities.
I think it's easy to become concerned when an ASX share suddenly falls 10% or 20%, especially after disappointing news.
However, I'd want to understand what has actually changed. Has the company's competitive position deteriorated? Are its long-term earnings prospects weaker? Or have investors simply become less willing to pay a premium?
Those questions can help distinguish a genuine problem from a potential buying opportunity.
And when I find a strong ASX share trading at an attractive valuation, I want to have the confidence to buy, even if market sentiment remains negative.
Give your investments time to grow
Buffett has long encouraged investors to think in decades rather than weeks or months.
I think that mindset can make a big difference. When buying an ASX share, I want to consider where the business could be in 10 years.
Can it attract more customers, expand into new markets, increase profitability, and reinvest its earnings?
If the answer is yes, I believe there's a good chance it could become considerably more valuable over time.
Of course, progress won't always be smooth. But I think patience gives successful businesses the opportunity to deliver the earnings growth that ultimately supports higher share prices.
Foolish takeaway
I don't think investors need to copy Buffett's portfolio to benefit from his investment philosophy.
For me, the biggest lessons are understanding what I own, buying quality businesses at sensible valuations, and giving them enough time to grow.
And if I can consistently apply those principles when choosing ASX shares, I believe I'll have a much better chance of achieving attractive long-term returns.
The post How Warren Buffett can make you a better ASX share investor appeared first on The Motley Fool Australia.
Motley Fool contributor Grace Alvino has positions in Wesfarmers. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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