I'd use these steps from the Warren Buffett/Charlie Munger method today

Warren Buffett and Charlie Munger's focus on industries they understand and their patient approach could be useful in today's investing environment.

asx share price growth represented by hand holding hourglass surrounded by dollar signs

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Warren Buffett and Charlie Munger are two of the most successful and revered investors of all time. They have delivered market-beating returns on a consistent basis over a long period of time.

Although following their strategies may not guarantee high returns, it could have a positive impact on an investor's portfolio in the long run.

As such, by focusing on industries that an investor understands, looking beyond short-term market movements and holding some cash, it may be possible to earn relatively attractive returns from equities.

Warren Buffett and Charlie Munger's limited knowledge

Despite their track record of high returns, Warren Buffett and Charlie Munger do not invest in every industry available to them. In fact, many of their most successful investments over the years have been in the consumer goods and banking sectors. They have often overlooked technology businesses, as well as other sectors that many investors have profited from.

The main reason for this is that Buffett and Munger prefer to focus their capital on sectors that they fully understand and where they may have a competitive advantage versus other investors.

This may reduce the risk of their investments since they fully comprehend the potential threats that may be ahead. Similarly, it may mean higher return potential because they are able to identify the most appealing investments in an industry at a given point in time.

Although following a similar approach means that an investor may miss out on some attractive buying opportunities, the success of Warren Buffett and Charlie Munger shows that investors do not necessarily need to be experts in all industries to outperform the stock market.

Looking beyond short-term market movements

Warren Buffett and Charlie Munger also look beyond short-term market movements when investing. This allows them to avoid becoming too fearful in a market downturn, enabling them to buy stocks when other investors are selling them.

Equally, in a bull market, they rarely become excited about a stock market rally. This helps them avoid overpaying for shares when other investors allow their optimism to cloud their judgment.

By taking a long-term view, it is possible to capitalise on the stock market cycle more easily. It shows that gains and losses for the market have never previously lasted in perpetuity. By understanding this cycle and seeking to profit from it, it may be possible to earn higher returns in the long run.

Holding cash

Warren Buffett and Charlie Munger also hold relatively large amounts of cash at all times. They do not rely on its returns but rather use it to be able to respond quickly to short-term market movements that can create temporary buying opportunities. Holding some cash may also provide peace of mind during uncertain periods.

As the 2020 market crash showed, stock markets can recover quickly from their downturns. By being able to react quickly, it may be easier to take advantage of short-term mispricings.

Should you invest $1,000 in Livium Ltd right now?

Before you buy Livium Ltd shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Livium Ltd wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Two male ASX 200 analysts stand in an office looking at various computer screens showing share prices.
Broker Notes

Macquarie tips 20% upside for this ASX 200 industrials stock

Let's see what the broker is saying about this stock following an update.

Read more »

A man with a wide, eager smile on his face holds up three fingers.
Gold

3 reasons this ASX 200 gold mining giant could soar higher into 2026

A leading expert forecasts more outperformance from this surging ASX 200 gold stock.

Read more »

A young woman lifts her red glasses with one hand as she takes a closer look at news about interest rates rising and one expert's surprising recommendation as to which ASX shares to buy
Broker Notes

Top brokers name 3 ASX shares to buy today

Here's what brokers are recommending as buys this week.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

CBA shares hit a new $176 record high. Too late to buy?

What can stop this bank now?

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why James Hardie, Mayne Pharma, Nufarm, and Resimac shares are falling today

These shares are having a tough time on hump day. But why?

Read more »

Person pointing at an increasing blue graph which represents a rising share price.
Share Gainers

Why Adriatic Metals, Catapult, Seek, and TechnologyOne shares are racing higher today

These shares are having a good time on hump day. But why?

Read more »

a group of business people sit dejectedly around a table, each expressing desolation, sadness and disappointment by holding their head in their hands, casting their gazes down and looking very glum.
Mergers & Acquisitions

This ASX 300 share is sinking 33% on takeover collapse fears

Is this takeover dead? Let's find out what is happening.

Read more »

Mum playing with her baby boy holding him on her tummy as she lays down while smiling about the Bubs share price going up today
Broker Notes

Macquarie tips 80% upside for this ASX All Ords healthcare stock

This out of favour stock could be primed for a rebound.

Read more »