1 Simple Way to Think Long Term Like Warren Buffett

Credit: The Motley Fool

Investing maestro Warren Buffett does not need much introduction. As the Chairman and Chief Executive Officer of Berkshire Hathaway Inc., he is widely viewed as one of the most successful investors in history after helping Berkshire achieve a compounded annual growth rate of 20% in its book value for close to 50 years.

Lessons from Buffett

Besides being a terrific investor, Buffett had a way of putting difficult topics into context. In a 1990s speech to the Notre Dame university, Buffett expressed his thoughts about Berkshire’s largest holding at that point of time, The Coca Cola Co. He gave a simple reason why he bought the Coca Cola company (emphasis mine):

We have 7% of Coke. There are 660 million eight ounce servings of Coca Cola products being served around the world today, so in effect, we’ve got a 45 million soft drink business with our 7%. We think of businesses that way. I say to myself “just increase the price a penny and that’s another $450,000 a day for Berkshire.” I mean, it’s a nice sort of thing. When I go to bed at night I figure that by the time I wake up 200 million Cokes will have been consumed. It goes all night when I sleep.

One take away from the investing master’s statement was that every investor should find the most appealing element of an investment which allows them to sleep well at night. As each individual is different, this could mean different things to different people.

Comfort zones for the investor

How does this all translate to individual investors like you and me? My fellow Fool Stanley recently wrote a piece about different types of investing namely, growth, income, and value. When we apply Buffett’s thoughts on Coca Cola into Stanley’s framework of investors, we can find some examples of where different investors can find their own comfort zones.

Income investors may find comfort from the fact that profits from their invested shares are being returned to their own pockets in the form of dividends. As such, the thought of receiving dividends every year from steady dividend payers like aircraft engineering outfit, SIA Engineering Company Limited (SGX: S59) or stock exchange operator, Singapore Exchange Limited (SGX: S68) may be the thing that income investors look forward to every year.

Growth investors, on the other hand, may find more comfort in the great track records, and vast addressable markets of companies such as health-care provider, Raffles Medical Group Ltd. (SGX: R01). In this case, Raffles Medical has purchased adjacent land to its flagship hospital, and is looking to expand its profitable flagship hospital business in the years ahead. As one of the top performing shares over the past decade, growth investors would looking to Raffles Medical to continue its long-term growth run.

For value investors, the appeal could come from the bargain-priced valuations for companies which are facing temporary business issues. Bargains could be in the form of a low price to book ratio like what we see in Frasers Centrepoint Ltd (SGX: TQ5). The thought of a limited downside for the share prices versus a potential upside may be the thing that nourishes long term belief in a value investor.

Foolish take away

Each individual investor should find the most appealing investing element of a company – be it growth, income, or value – which matters most to them. The belief in a company is the key thing which will give investors a good night’s sleep without worrying what will happen when they wake up tomorrow. As Buffett would put it, his investment in Coca Cola yielded an additional 200 million Coca Cola consumptions every waking day – a nice comforting thought, and one that fuels his belief in Coca Cola for the long term.

If you are able to find the thing that matters most to you, it may become the foundation for your belief in the company to hold for the long term. And, when you do hold, you may find the odds of success favouring you.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway.