A popular expression in investment communities is "buy low and sell high."
While this can work out well for investors, it does mean you could miss out on the power of compounding.
This is when you earn interest on interest or, in the case of ASX shares, returns on returns.
It is for this reason that I would prefer to do things the Warren Buffett way by buying low and holding for the long term.
This doesn't necessarily mean set and forget, though. It just means that as long as the investment thesis remains intact, I would hold onto these ASX shares and let compounding work its magic.
This is how the Oracle of Omaha has generated staggering returns over multiples decades.
And when I say staggering, I mean it. The most recent Berkshire Hathaway (NYSE: BRK.B) annual letter reveals that the book value of its shares has increased by an average of 19.8% per annum between 1965 and 2022. This is exactly double the return of the S&P 500 index over the same period.
And what a difference that extra 9.9% per annum has made.
Berkshire Hathaway's return of 19.8% per annum has led to a total return of 3,787,464% for investors. To put that into context, a single dollar investment would have turned into over $3.75 million today.
As a comparison, a single dollar invested in the S&P 500 index would have turned into almost $25,000. While that's nothing to turn your nose up to, I know which return I would prefer!
What's the secret?
Warren Buffett revealed his secret in his latest letter to shareholders. Interestingly, the legendary investors quipped that most of his "capital-allocation decisions have been no better than so-so."
The secret has been finding a few winners over the years and letting them run. He adds:
Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire.
The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.
What to look for with ASX shares
To follow in Buffett's footsteps, I would look for ASX shares that are good value, have high quality business models, sustainable competitive advantages, and positive outlooks.
These qualities combined arguably put investors in a great position to generate market-beating returns over the long term.
