How to invest like Warren Buffett
Warren Buffett, the billionaire CEO of conglomerate Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), is one of the most successful stock-pickers and value investors of all time, and many investors aspire to replicate his success. The good news is, you can learn the principles Buffett uses to choose stocks and apply them to your own investment strategy.
Self-made billionaire Warren Buffett has been called the greatest investor in the world.
So it should come as no surprise that the Berkshire Hathaway CEO has scores of investors hoping to follow in his footsteps by adopting his investing principles.
Former hedge-fund manager and Buffett follower Whitney Tilson attributes the 89-year-old’s success to his “off-the-charts smarts,” his more than seven decades of experience and his temperament.
“What he does is simple in concept but difficult in practice,” said Tilson, now the founder and CEO of Empire Financial Research and publisher of a daily subscription newsletter. He has attended 21 Berkshire Hathaway annual shareholder meetings in Omaha, Nebraska.
“There are a lot of people, myself included, who have tried to do what he does, but he has done it better than anyone for a longer period of time,” he added.
Buffett, who is worth $83.4 billion according to Forbes, began investing as a child. He bought his first stock when he was 11-years-old and he’s been doing it ever since.
Here are seven steps you can use to create your own portfolio of “Buffett stocks”:
- Invest in what you know.
- Learn the basics of value investing.
- Identify cheap stocks.
- Invest in good management.
- Be aggressive during tough times.
- Keep a long-term mindset.
- Always keep learning
Invest like Warren Buffett ## Invest in what you know
Before you invest in any stock, you should be able to understand what the business does and how it makes money. That’s the reason Buffett has historically avoided most tech stocks — he says he simply doesn’t get their business models, so he sticks to what he knows best. While Berkshire’s stock portfolio and subsidiaries represent a diverse mix of companies, you’ll notice a high concentration in certain industries, such as insurance, banking, utilities, and consumer products. These are all businesses Buffett understands very well, so it makes sense that he’s willing to put a great deal of capital into them.
Invest like Warren Buffett ##Learn the basics of value investing
Warren Buffett believes that most Americans are better off buying low-cost index funds as opposed to individual stocks. It’s not that there isn’t money to be made in evaluating and selecting stocks, but most people don’t have the time, desire, or knowledge to do it right.
If you’re reading this, I’m assuming you have the desire to invest, as well as the time to do some homework. But before you can invest like Buffett, you need a strong knowledge of value investing. Watching financial news and reading articles like this one is a good start, but I highly recommend a couple of books to any aspiring value investor:
Between the two, you’ll have an excellent foundation for evaluating stocks and finding overlooked value in the market.
Buffett has said that “what is smart at one price is stupid at another.” With a strong knowledge of value investing concepts, you’ll be well positioned to make that distinction.
Invest like Warren Buffett ## Identify cheap stocks
Once you’ve established your value-investing criteria, it’s time to make a list of stocks that fit your wish list. For example, let’s say you want stocks that trade for less than 15 times earnings and have a strong history of generating 20% returns on assets year after year. Most brokerage accounts offer screeners and other tools to make this process easier and will generate a list of stocks based on your criteria.
Invest like Warren Buffett ## Invest in good management
It’s hard to put enough emphasis on the value Warren Buffett places on good management. Buffett will invest in a stock only if he trusts management and thinks it will continuously act in shareholders’ best interest. Positive signs include a history of dividend growth and buybacks (both ways of returning capital to investors), and excellent reputations. Warren Buffett often spends a considerable portion of his shareholder letter praising the leaders of Berkshire’s subsidiaries, and he has bought and sold investments based on management actions.
Invest like Warren Buffett ## Be aggressive during tough times
It’s generally a bad idea to time the market. Long-term investors will probably do fine no matter when they buy.
Warren Buffett invests money in good times and bad, but he did a great job of capitalizing on opportunities during and shortly after the Great Recession, with such savvy deals as his Bank of America investment. “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold,” Warren Buffett told shareholders in his latest annual letter
Keep a long-term mindset
Increasingly, few investors buy for the long term. For many professionals and even individuals, investing has become more like a video game. You don’t sit in one place all day, you move and react with the market. This feels satisfying. You are actively managing your money.
What Buffett is trying to say is that he goes into his investments with a long-term mentality. In other words, if he can’t see himself owning the stock for years, he won’t buy it at all. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes,” Buffett has said. Buying stocks because you think they’re going to have a good quarter, or because a hot new product is being released next year, is simply not Buffett’s way.
Buffett warns against speculation, the practice of grabbing a stock and hoping that its price will soar. He warns investors to focus on a business’ long term potential, not the jitters of its day-to-day price. And he advises that investors plan their stock purchases for the long term. When looking for an investment, find one that you would like to have for several years, not one that you plan to flip in a few months.
Always keep learning
Buffett is a big believer in continuously learning throughout life.
By the time he was 10 years old, he read every book on investing in the Omaha public library and many of them read twice. And he hasn’t stopped. He has famously said he still reads about 500 pages a week.“I remain very big on the idea of reading everything in sight,” Warren Buffett said in the 2007 Berkshire Hathaway meeting.
Tilson said to invest like Warren Buffett, you need to become a “learning machine” for your entire life.“You need to get on that steep learning curve at a young age and never get off,” said Tilson.
Warren Buffett does not pay attention to day-to-day stock prices, and he does not particularly care about what the press has to say. Furthermore, he could care less about the newest technology. What he wants to know is if he understands the business. Is it undervalued? Is it making money? If the answer is affirmative to those queries, then Buffett buys. If five years later any of those changes, he sells. Plain and simple.
This is how to invest like Warren Buffett. This is not his specific criteria but outlines his discipline in sticking to his investment rules and principles. His criteria could be yours, or you could be a more technical investor who uses math and stock charts. Regardless of what criteria you set, you may not end up a billionaire, but you will have fewer losses in some investments, and more profits in others.
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