How To Invest Like Warren Buffett
Warren Buffett is arguably the most successful investor of our time. Buffett is still the chairman and CEO of Berkshire Hathaway at 88 years old. As of 2018, Warren Buffett has a net worth of $86.7 billion. Buffett is known for being a philanthropist and gives away a lot of his money. Over the last 10 years, this has amounted to more than $27 billion.
Despite being one of the richest people in the world, Buffett is known for being very frugal. He still lives in his Nebraska home that is worth around $650,000 today.
Aside from drinking more Coca Cola than most teenagers do, eating Cheetos and reading, Warren Buffett is a stock market investor. Warren Buffett earned most of his money from investing in companies and 99% of his net worth was earned after his 50th birthday.
Millions of stock market investors idolize Warren Buffett, and in this article we will be exploring 7 ways that you can think and invest like billionaire Warren Buffett.
1. Invest in what you know.
Did you hear about Warren Buffett buying weed stocks? Or getting in on the hottest new cryptocurrency to hit the market?
Warren Buffett is known for investing in simple businesses. He invests in what he understands. Cryptocurrencies and weed stocks would fall short of a lot of Buffett’s criteria, but the main point here is that he does not invest in something if he does not understand it. You shouldn’t either!
One of the easiest ways to test your understanding of a company is the elevator pitch. You have 30 seconds (the length of an elevator ride) to explain what that company is doing and why you are investing in it. If you can’t, you don’t understand what you are investing in. You need to be able to understand what the business does and what they are doing to make money. You should be able to identify the competitors, what isolates them from the competition and name their management team (more on that point later).
Warren Buffett does has some favorites. He invests heavily in banking, insurance, consumer staples and utilities. All of these businesses are easy to understand!
In the annual letter to shareholders, Berkshire Hathaway discloses the largest positions they have in companies. You can see a common theme here, with Apple being the only stock that sticks out. Despite shying away from technology and still using a flip phone, Buffett has a sizable position in Apple. Buffett invests in Apple stock because he believes they have extraordinary products that have become an essential part of our everyday lives. Beyond Apple, we see investments in financial services, banking, telecommunications, food and beverage, airlines, oil and automotive.
One of the other characteristics of companies that Warren Buffett invests in is durability. Buffett invests in durable time tested businesses. He invests in companies that have been around for decades with experience in all market conditions. If you want to invest like Warren Buffett, consider investing in some durable blue chip stocks. A great place to start is by looking at stocks on the Dow Jones!
2. Understand price versus value.
“Price is what you pay. Value is what you get.” – Warren Buffett
Warren Buffett is a long term value investor. He invests in companies based on the underlying value of the shares. Determining the underlying or intrinsic value of a stock is very difficult, which is why Buffett recommends that most people just invest in low fee index funds.
If you do want to learn about value investing, you should learn from the man who taught Warren Buffett. This was a man by the name of Benjamin Graham, mentor to Warren Buffett. In the book The Intelligent Investor, Benjamin Graham teaches the principles of value investing. Before you run out and buy a copy, be forewarned that this book is over 600 pages long and it was originally published in 1949! Despite the age of this book, the principles are still valuable and relevant.
Here is a book summary you might enjoy.
3. Invest for the long haul.
Warren Buffett is a long term investor. He patiently waits for investment opportunities, and once he buys shares he rarely sells them. Some of Buffett’s investments date back to the 1960’s! Warren Buffett started buying stock in American Express in 1964.
If you want to invest like Warren Buffett, you need to have a long term mindset when it comes to investing. Buffett does not care about what a company or stock is doing in the short term. He focuses on the long term and looks at what companies will have a long term competitive advantage over the next decade or more.
Stocks are a long term investment. The movement of the share price in the short term is unpredictable. Trying to bet on what will happen to a stock in the short term is near impossible. If you want to pick stocks, your best chance of success with that strategy is investing for the long term. Not to mention, you will have a significant tax savings as well holding stocks for the long term.
If an asset is held for one year or less, the capital gain recognized on that investment is considered to be a short term capital gain. This type of capital gain is taxed at the highest rate possible, typically the same rate as your ordinary income tax rate.
If an asset is held for over one year, the capital gain recognized on that investment is considered to be a long term capital gain. This type of capital gain is taxed at a lower tax rate.
4. Be greedy when others are fearful.
Benjamin Graham, mentor to Warren Buffett, once said that the market is a pendulum, forever swinging between optimism and pessimism. Warren Buffett learned a lot from Benjamin Graham. For example, Buffett has said that you should be greedy when others are fearful and fearful when others are greedy. Optimism leads to greed and pessimism leads to fear. Buying from the pessimist means that you are buying stocks when there is fear in the market, or buying low. Selling to optimists means that you are selling stocks when there is optimism or euphoria in the market, or selling high.
If you hear everyone talking about a hot stock, it is probably time to sell it. The underlying value of a stock does not change in the short term, only the price does. At some points, the price is high due to greed and feelings of euphoria. At other points, the price is low due to feelings of fear.
Most people make money in the stock market through asset appreciation. You buy shares at a low price and sell them down the road at a higher price. If you want to invest like Warren Buffett, do not buy shares of stocks at all time highs! You do not see Warren Buffett investing in the high flyers of the market because it violates (at least) two of his investing principles; price versus value and being greedy when others are fearful.
Stocks are the only thing people are afraid to buy on sale. If you go to the grocery store and find out Tide laundry detergent is 50% off, you would load up. If Procter & Gamble stock goes on sale, the producer of Tide, people are afraid to buy it! When a company stock goes on sale, you typically have a lot of talking heads on TV telling you to sell. This is actually the time when you would want to buy!
With the stock market, doing what is right often feels wrong.
If you study Warren Buffett, you will also find that he puts little stock in what Wall Street analysts have to say (pun intended).
“We have long felt that the only value of stock forecasters is to make fortune tellers look good.” – Warren Buffett
You will not find Warren Buffett glued to the TV on a Monday afternoon looking to catch up on the latest market opinions. Buffett is likely reading a book in his office. If you want to invest like Warren Buffett, you need to formulate your own opinion surrounding investments. While there is nothing wrong with having a discussion about stocks you own or are watching, you should not be swayed by the opinions of just anyone.
5. Buy Berkshire Hathaway stock.
One of the easiest ways to invest like Warren Buffett is to invest in his company Berkshire Hathaway. Berkshire Hathaway is a holding company owned by Warren Buffett. From 1965 to 2017, Berkshire Hathaway stock has had a compounded annual gain of 20.9% per year, compared to a 9.9% return from the S&P 500.
A lot of people are curious about the share price. The reason why Berkshire Hathaway stock trades at a share price of over $300,000 is that this stock has never been split. When the share price becomes out of reach for most retail investors, a company will often split the shares to make the price more accessible. Instead of splitting, Berkshire Hathaway instead offers Class B shares under the symbol BRK.B which currently trades at around $200 per share.
While Berkshire Hathaway has an impressive history of beating the S&P 500, you might not want to invest in this stock. The main reason is one that many large investment funds have as well. The larger a fund becomes, the larger the opportunities they need to find. It is difficult for a company with a market capitalization of over $500 billion and a cash pile of over $100 billion to find new investments.
Small and mid cap companies are essentially off the table. For Berkshire Hathaway to have a meaningful position in companies these size, they would likely have to own it. This limits investments and acquisitions to just the largest companies out there. For that reason, Buffett has said that it will be more difficult to generate market beating returns going forward.
Another important factor to remember is that Warren Buffett is 88 years old. If you are looking to invest for the long term, you will need a new strategy or leader once Buffett steps down or passes on.
“Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” – Chinese Proverb
It is much more valuable to know how to invest on your own instead of simply following the strategy of someone else.
6. Pay attention to the management team.
Warren Buffett spends a lot of time learning about the management team of a company. A good management team is a characteristic of any company Buffett invests in. Buffett looks at how management treats shareholders, employees, customers and even the environment. Above all else, he looks for management to be honest with the shareholders.
Buffet looks at a number of factors including share buybacks, dividends, dividend growth and the overall company reputation. If management is acting responsibly, dividends should be paid on a regular basis with a long history of consistently raising that dividend. Shareholders should also be rewarded through a company sponsored share buyback program.
If you want to invest like Warren Buffett, get to know the management. Read the annual reports, earnings reports, watch interviews and study the career path of the company management team. Do they have an outside hire? Where did they work before?
7. Invest in the two fund portfolio.
If Warren Buffett hadn’t made a career of picking stocks, how would he have invested? Luckily for us, Buffett has answered that question. In a letter to shareholders, he outlined a retirement plan that anyone could implement with ease. It does not involve diligent research and stock picking. It involves investing in two funds.
The first is a low fee S&P 500 index fund.
The second is a short term government bond fund.
That’s it. Warren Buffett recommends investing 90% of your money in the S&P 500 fund and the remaining 10% in a government bond fund. As far as funds go, Warren Buffett recommends Vanguard products for good reason. They are known for having extremely low fees and wonderful financial products.
Instead of trying to beat the market, Buffett believes the average investor should own the entire market. It is important to remember that this portfolio is very broad and it is not specific to any persons individual needs. If you are looking for a long term investing plan, you should consider speaking with a financial advisor.
If you want to pick stocks and invest like Warren Buffett, follow these strategies! If you want to follow Warren Buffett’s investment advice, go for the two fund portfolio. At the end of the day, the most important thing is that you are investing!