How to build your superannuation the Warren Buffett way

Superannuation is naturally suited to long-term investing.

For many Australians, the money could remain invested for decades. That gives compounding plenty of time to work.

And I think some of Warren Buffett’s most famous investing principles fit that timeframe remarkably well.

Start with businesses you understand

Buffett has spent decades investing in companies whose economics he understands.

I think that is a sensible place to start when choosing ASX shares for a self-managed superannuation fund (SMSF).

Rather than chasing whichever sector is attracting the most attention, I would focus on businesses where I can clearly explain how they make money, why customers keep coming back, and what could make them more valuable over time.

That could include a major bank such as Commonwealth Bank of Australia (ASX: CBA), a resources giant such as BHP Group Ltd (ASX: BHP), or a healthcare business such as CSL Ltd (ASX: CSL).

The important point is not owning those particular companies. It is being able to understand the investment well enough to remain confident through inevitable periods of market volatility.

Look for lasting competitive advantages

Buffett has frequently focused on businesses with sustainable competitive advantages.

For an ASX investor, I would look for qualities such as strong brands, loyal customers, economies of scale, valuable technology, or services that would be difficult for competitors to replicate.

Pro Medicus Ltd (ASX: PME) is one example that comes to mind.

Its Visage medical imaging platform has become embedded within major hospital systems, where reliability and performance are extremely important. Replacing critical healthcare software is not something a hospital is likely to do casually.

That type of customer relationship can help a strong business keep growing for many years.

I think these are exactly the sorts of companies worth looking for when the goal is building wealth over decades rather than finding the next quick winner.

Let compounding do its job

Buffett’s extraordinary wealth was not created from one brilliant investment. A huge part of the story is the length of time his capital has been compounding.

Superannuation investors have an advantage here because retirement savings are usually invested over a very long period.

If a company can keep increasing its earnings, reinvesting successfully, and becoming more valuable, shareholders can benefit as that process continues.

This is why I would be reluctant to constantly trade a superannuation portfolio. A great business does not suddenly become a poor long-term investment because its share price has a difficult month.

Giving strong companies time can be one of the most important parts of the strategy.

You don’t have to pick shares

There is another Warren Buffett lesson I think is especially relevant.

Despite his remarkable success selecting individual companies, Buffett has repeatedly argued that most investors can do very well with a low-cost index fund.

Australians could apply that idea through a broad exchange-traded fund (ETF).

The Vanguard Australian Shares Index ETF (ASX: VAS), for example, provides exposure to hundreds of Australian companies through one investment.

An investor wanting greater international diversification could also consider a broad global fund or something like the iShares S&P 500 AUD ETF (ASX: IVV).

This approach removes the need to identify which individual companies will outperform. Investors can instead capture the returns generated by a large collection of businesses and concentrate on remaining invested.

That may sound less exciting than trying to find the next ten-bagger, but Warren Buffett’s philosophy has never been about making investing exciting.

It is about making sensible decisions and allowing time to work in your favour.

Foolish takeaway

I would not try to turn a SMSF portfolio into a replica of Berkshire Hathaway.

Instead, I would borrow the principles that have helped Warren Buffett invest successfully for decades: understand what you own, favour strong businesses, think long term, and avoid unnecessary activity.

For investors who enjoy researching shares, that could mean patiently owning a collection of high-quality ASX businesses.

For everyone else, a low-cost diversified ETF could make the process much simpler.