When you talk about some of the most successful investors of our time, Warren Buffet is a very worthy mention. He is the CEO and chairman of Berkshire Hathaway, and he is ninety years of age. He currently has a net worth of about eighty billion dollars and the numbers would have been higher for his philanthropies. In fact, he has donated sums to the tune of about thirty-seven billion dollars over the course of fourteen years.
One of the key beneficiaries of his donations is the Bill and Melinda Gates Foundation. He often does this because of his long-standing friendly relationship with Bill Gates. A frugal billionaire and one of the richest men in the world, Warren still lives in his home in Nebraska his current worth is about $650,000. This is not because he cannot afford a more expensive home, but his love for investment is greater. When he is not investing heavily and prudently in the stock market, he can be seen eating Cheetos and drinking Coca-Cola like most teenagers. He also loves to read informative books.
He was a late bloomer as most of his wealth came after he reached the 50-year-old mark through investments in companies that showed great prospects.
As far as investments go, he is the Harry Porter of the stock market and is an idol to many top and promising investors. In this article, we will be discussing some of the ways one can invest like Warren Buffet.
Invest for the long-term
Stock market investments are long-term investments. You should not compare them to get rich quick schemes. As a wise investor, Warren Buffet always waits patiently for investment opportunities. When he sees them and buys shares, he does not sell out of panic. Did you know that some of Buffett’s investments were made back in the ’60s? A perfect example of this stock is American Express. He started investing in the company as far back as 1964, and he is still investing in the company to this day. So, you need to develop a mindset for the long-term if you want to be as successful as Warren Buffet. He is never fazed by whatever is happening in the stock market in the short-term but always looks ahead to the long-term advantages of his investments. Stock prices movement in the short term is very unpredictable, and this simply means the market is highly volatile. Also, it is always better to make long-term investments in companies only when you have fully understood them. This is why investors always look to copy Warren Buffet’s style of investing in only the companies he fully understands.
However, if you want to choose stocks instead of investing in low fee index funds, your best bet is making these long-term investments. You should also have significant tax savings when you hold stocks for the long term. Let us discuss this further:
If you hold an asset for one year, the capital gain realized on the investment is seen as a short-term capital gain. This capital gain type incurs the highest possible rate, similar to the ordinary income tax rate.
On the other hand, if you hold an asset for more than one year, the capital gain realized is seen as a long-term capital gain and is taxed at a much lower rate. This inevitably results in significant savings on tax fees. Tax planning is one of the best ways to boost your returns as a seasoned investor because most of the short-term investors end up paying huge taxes for their short-term capital gains, except they opt to invest in tax-sheltered Roth IRA.
Follow the activities of the management team
Like Warren Buffet, you need to invest more time in knowing what the management team is up to. The progress of any company depends on the efficiency of the management team, and it is one of the criteria for Warren Buffet’s choice of companies. He observes the relationship between the management and its employees, shareholders, customers, and even their surrounding communities. He also looks out for the level of honesty of the management team.
He also observes the company’s dividends and dividend growth, share buybacks, and the general reputation of the company. Responsible management makes sure that dividends are paid in full and on time to the shareholders, and there should also be a high level of consistency. So, to be like Warren Buffet in terms of investments, know the management of your company a little better. You can do this by reading the company’s earnings and annual reports, watch their interviews and attend shareholders’ board meetings, and study the growth and path the management team is following.
This may seem like a lot of stress to most investors, but it is this little effort that may keep you one foot ahead of other investors, and if you do not find the time to do it, you might just settle for Warren Buffet’s suggestion of low fee index funds.
Do the opposite of what others are doing
Benjamin Graham once described the stock market like a pendulum bob that constantly swings between pessimism and optimism. Warren Buffet made so much of this particular illustration. He even went on to say that you need to be fearful when others are greedy and greedy when others are fearful. See things this way:
Buying from a pessimist simply means that you are purchasing stocks when fear is building in the market.
Selling to an optimist simply means that you are selling shares when optimism is building in the market. So, when you hear someone call a stock hot, it just might be the time to sell the stock.
The underlying value of stocks do not change during the short-term, but prices do because, at different points, prices may be high due to feelings of greed and euphoria while at other points, the prices may be low due to panic and fear.
Humans also have this high tendency to follow the crowd. This means that when some people see others buying into a stock, they just rush in and do the same. When these stocks fall in price, and the fear begins to creep in, we panic sell. This is exactly the inverse of what Warren Buffet advocates.
Now, how do people make money in the stock market?
The basic way to make money in the stock market is through asset appreciation. You can buy shares at a lower price and sell them in the future at a higher price. If you wish to follow in Warren Buffet’s footsteps, do not buy stocks when the prices are high. As a wise investor, he does not invest in the market’s high flyers because it is in direct violation of two of his founding principles, being fearful when others are greedy and the price versus value evaluation. Stocks are basically the only things people do not usually buy when they are on sale. For instance, if you step into a grocery store and see products on sale, it will appeal to you as the best time to buy. This is not the case with stocks.
Doing what is right may often feel wrong when it concerns the stock market. Study Warren Buffet’s investment strategy, and you will see that he invests less in the stocks that most analysts suggest. He literally does not even have the time to watch the TV waiting for stock reviews or market trading opinions of experts. Instead of listening to them, he prefers to form his own opinion about the market and act purely on his own instincts. It does not mean that those who seek the opinion of experts and analysts are wrong, but you should take the information, filter it, and act on what you believe is right for you. To Warren Buffet, times of panic and market pessimism and mostly the best opportunities to invest in the stock market.
Have good knowledge about price and value
There is a thin line between price and value, even though most investors do not know it yet. Price is what you pay for a good or service, but the value is what you get out of it, according to this great investor. So, instead of price, Warren Buffet’s preference is on value because he is a long-term investor.
He makes investments in companies based on the values of their shares. It is a little tricky to understand the intrinsic value of shares so as a seasoned investor, he always advises people to invest in low fee index funds. These funds allow investors to keep track of the entire stock market instead of trying to beat the market through calculated stock choices. The rate of failure in terms of beating the market is so high that investing in low fee index funds is the logical and wisest choice for most investors. Now, Warren Buffet was mentored by Benjamin Graham, and he is the man you might want to learn the importance of value investing from.
In his book “The Intelligent Investor”, Benjamin Graham outlines the principle of value investing. However, you need to know that this book is over seventy years old and has over six hundred pages. But getting the book guarantees you the principles of value investing and these principles are still relevant today.
When it comes to stock investments, the attention of most people is fixed on the stock prices. They only lookout for the high flyers of the stock market and try to be partakers of what looks good on the surface. However, only a select few drawbacks and consider the value of these stocks. These select few are the wise investors who are not influenced by the hype. Instead, they dive deep into the fundamentals and financial documents of the companies before buying stocks, strictly on their intrinsic values.
Focus your investments on what you understand better
Warren Buffet as an investor does not invest in cryptocurrency or football for just one good reason; he does not understand it. Instead, he focuses on simple business he understands perfectly. These businesses he chooses not to invest in do not match his preference, and that is why he does not invest in them. So, if you want to take a leaf from his investment book, do not invest in what you do not know.
Now, how do you test your level of understanding of a company?
One of the easier ways would be through the elevator pitch. See the Elevator pitch this way, and if you cannot understand what the company you are investing in and why you are investing in it in thirty seconds, then you probably should not be investing in it. To make a profitable investment, you need to be able to understand a business and what they are doing. The truth is if you do not understand the company’s business fully, you just might make poor investment decisions down the line. For example, if your stock prices rise and you do not know why you might be pressured to panic sell or do something worse. But if you have a better understanding of the company’s business and stock position, you will be unfazed by any volatile changes in the prices of your stocks. As an investor, you should have your preferences and favourites. Warren Buffet prefers to invest in utilities, consumer staples, banking, and insurance. Some of the companies he invests in are Apple Inc., Bank of America Corporation, The Coca-Cola Company, The Goldman Sachs Group Inc., Wells Fargo & Company, to mention but a few. The similarity between all these businesses is they are easier to understand.
His company discloses the positions they hold in most of these companies in their annual letters to shareholders. Warren Buffet may not be a big fan of Apple Inc. products, but he invests in their stocks because of their undeniable potential. The other companies that make up the portfolio are companies from industries like finance, telecommunications, banking, airlines, automotive, and food and beverages. Investing in stocks is a long-term plan, so Warren Buffet always considers the durability of these businesses. He prefers to invest in companies that have stood the test of time. So, as an investor that wants to think like Warren Buffet, you can start investing in blue-chip stocks now. You can start by visiting “Stocks on the Dow Jones.”
Make a career out of investing in the two fund portfolio
Warren Buffet made a career of choosing his own stocks to invest in, but if he didn’t, can you guess how he would have invested? Luckily for us, he gave us an idea.
In one of his letters to the shareholders of his holding company, Berkshire Hathaway, he drew out a retirement plan that could be implemented with relative ease. Instead of choosing your stocks through pain-stacking research, you can settle for the two fund investment. This kind of investment is split into investing in low fee S&P 500 index funds and investing in short-term government bond funds. He proposes that you invest about ninety per cent of your money in the S&P 500 funds and ten per cent in government bond funds. He also recommends Vanguard products because they have very low fees and great financial products. This Vanguard 500 is a really good choice for the low fee S&P 500 index funds. Vanguard has also been known to offer Vanguard short-term treasury funds, a special type of bond fund.
So, instead of trying to beat the market, you can save yourself the stress and own the whole market. This portfolio is broad and is not suited to any person’s personal needs. You should also consider speaking to a financial advisor if you wish to make long-term investments.
So, if you want to pick your own stocks and make investments like Warren Buffet, it is fine. But if you do not have what it takes to pick stocks by yourself, opt for the two fund portfolio. In the end, you should be making profitable and viable investments for the long term.
Invest in his company’s stock
Berkshire Hathaway is one of the companies owned by Warren Buffet. Well, the company has stocks, and these stocks are thriving on the knowledge and expertise of the lord investor himself, Warren Buffet. If you want to think and invest like Warren Buffet, isn’t it right for you to just invest in his company?
From 1965 – 2017, this holding company has amassed a compound annual gain of more than 20.9% compared to 9.9% returns from the S&P 500 index. This has sparked some curiosity amongst investors about the stock price. When share prices of a company become out of the reach of most retail investors, the company may often resort to splitting the shares in a bid to make the stock prices more accessible. His company stocks have never been split.
Instead of splitting, the company prefers to offer Class B shares under another ticker symbol BRK.B which sell shares at a relatively lower rate. Berkshire Hathaway has built a reputation for beating the S&P 500, but not everyone wants to invest in the stock, and this is because the larger the funds, the larger the opportunities they may have to look out for. This also applies to investing in large investment funds. See it this way, and it is really difficult for a company that has a billion dollars market cap and cash piles to find any new investors.
Small and mid-cap companies are seemingly off the table on this one. For Warren Buffet’s holding company to hold any meaningful positions in companies of this size, they would most likely want to own it, limiting acquisitions and investments to the companies with larger market caps. Buffet has even said that for this reason, it may become more difficult to produce market-beating returns in the near future.
Another important factor to consider is Warren Buffet’s age. He is ninety years of age, and for someone looking to invest for the long-term, you may need a new leader or strategy in the event that Warren Buffet passes on.
A famous Chinese proverb illustrates that giving a man a fish feeds him for that day but teaching him how to fish feeds him for a lifetime. This means that you need to simply learn how to invest instead of waiting on the strategy of someone else, no matter how good the person is.
Here are bonus tips on how you can invest like Warren Buffet.
- Invest in companies that have a moat: This just means investing in companies with a competitive advantage. Examples of this moat may be economies of scale, product differentiation, high startup costs, government regulations, distributions and supply channels, etc.
- Have your own opinion: Do not always rely on analysts and investors to tell you what you should do. Study the market enough to make your own choices and right ones at that. Avoid stock tips from friends and family because it may not contain sustainable strategies. You also may not be getting these tips from experts, and if you act on the tips without full knowledge, there is bound to be a disaster.
- Never act on your emotions: Losing money and making money are strong enough to drive emotions, but you should try to keep control of both. When you act on impulse, you are bound to make bad moves. You do not want to lose money because you were too emotional because the stock market can punish you for any rash decisions. So, try to be calm no matter the situation. It will go a long way in helping you make the right choices.
Investing in the stock market is a tough journey, and even the best of analysts and investors make mistakes too. So, if you make mistakes, it is all part of the learning process. All you have to do is learn from them and improve because the main aim of investing is to earn much more than you lose.
Check out our previous article on “Financial Crisis And The Need For Financial Education“. We would love you to signup to our newsletter for more loads of investing information as we post them. You can also hit the share button on our social media page whenever we have any new updates.
Recommended books for further reading:
- Intelligent Investor: The Definitive Book on Value Investing – A Book of Practical Counsel
- The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits
- Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!
- Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage
- A Beginner’s Guide to the Stock Market: Everything You Need to Start Making Money Today
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- Passive income
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- Interactive Brokers
(‘68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.)