Warren Buffett bought his first shares of stock in 1941 at age 11. At age 15, Buffett had a net worth of about $6,000. Over the next 70 years, the Oracle of Omaha used his investing prowess to accumulate a fortune worth an estimated $84 billion and become the world’s third-richest person. Buffett became a legend among investors both because of his success and because of the seeming simplicity of his philosophy. The world of Wall Street is incredibly complex and complicated, but Buffett has earned his reputation by making investing seem easy.
Buy companies, not stocks
Stocks Buffett just bought or sold
Warren Buffett’s investing philosophy has always centered on identifying successful companies with reasonably priced stocks. He loves to identify companies with durable, competitive advantages in their respective industries. He has also historically invested in companies with valuable brands, such as The Coca-Cola Co. (KO) and Apple (AAPL). “Buffett cares much more about the underlying fundamental strength of a company and its leadership than what is happening with the company’s stock price,” says Owen Murray, director of investments at Horizon Advisors. He considers factors such as a company’s competition, its customers, and its products and services.
Identify companies with competitive moats
Warren Buffett once said that investors shouldn’t focus on an industry’s potential impact on society or how much it will grow over time. Instead, they should focus on identifying companies that have a durable, competitive advantage. Buffett also referred to the ability of a successful company to defend its business as a “competitive moat.” DataTrek Research co-founder Nicholas Colas says there are plenty of cautionary tales of companies that did not have competitive moats. “What does Apple have in common with Eastman Kodak (KODK) and Woolworth’s? The former is in the Dow; the latter two were there 20 years ago,” Colas says. Ignore day-to-day market movements.
Ignore day-to-day market movements
Warren Buffett once said investors should only buy stocks they would be comfortable holding if the stock market shut down for 10 years. There’s no point in losing sleep over day-to-day swings in the stock market or headlines about trade wars, government shutdowns or other short-term market catalysts. “Buffett does not pay attention to the day-to-day movement of stock prices,” Murray says. “He is much more interested in the potential of the companies he owns to grow over long periods of time.” Stock prices may change every day, but nothing significant about a company’s business typically changes in 24 hours.
Be fearful when others are greedy
One of Warren Buffett’s most frequently quoted lines is that investors should be “fearful when others are greedy and greedy when others are fearful.” In other words, the best buying opportunities in the market often occur when other investors are selling. “This is one of his greatest expressions and is mostly self-explanatory,” Murray says. “It speaks to being disciplined and rational in the face of the two extremes in investor sentiment – euphoria and panic.” An excellent example of Buffett’s contrarian tendencies is his $5 billion investment in Bank of America Corp. (BAC) in the wake of the 2008 financial crisis.
Control your emotions
A big part of being a disciplined investor like Warren Buffett is being able to control your emotions. Buffett is able to make rational investment decisions in situations where other investors often let emotions cloud their judgement. Michael Batnick, director of research at Ritholtz Capital Management, says it’s not necessarily Buffett’s intelligence that has made him so successful. “Emotions are a far more important driver of success than intelligence,” Batnick says. “What made Warren Buffett such a great investor was not just superior intellect, it was his emotional fortitude to stay true to his strategy during deep drawdowns."
Invest in what you know
With such a long-term track record of success, some investors may assume that the Oracle of Omaha is an expert in all areas of the market. In reality, he has often admitted he is not the most tech-savvy person. Warren Buffett has never owned shares of Amazon.com (AMZN) or Alphabet (GOOGL) subsidiary Google. “Never invest in a business you don’t understand,” Buffett once said. That philosophy may have caused him to miss out on Google and Amazon, but it also allowed him to avoid the worst of the dot-com bubble back in 2000 and the bitcoin collapse last year.
Buy Buffett stocks
Warren Buffett is famous for keeping things simple when it comes to investing. Rather than trying to guess which stocks Buffett would buy, investors can simply buy stocks that Buffett already owns. Buffett and other institutional investment managers must publicly disclose their holdings each quarter. He currently has massive stakes in Apple, Bank of America, Wells Fargo & Co. (WFC) and other stocks. Of course, investors can keep it even simpler and just buy shares of Buffett’s company Berkshire Hathaway (BRK/B). In addition to public stocks, Berkshire also owns private companies such as Geico, Duracell and Dairy Queen.
|For more news you can use to help guide your financial life, visit our Insights page.|