It’s testament to the simplicity of Warren Buffett’s investment strategy that 80 years on from the seasoned investor’s first forays into the stock market, we are still looking to him as one of the leading lights when it comes to knowing how to invest.
Here we look at some of the hallmarks of that strategy, so that if you would like to know how to invest like Warren Buffett, you have a few starting points from which to develop a portfolio of your own.
1. Take it slow
Buffett has spent his entire life building his portfolio – he visited the New York Stock Exchange aged ten and bought shares for himself and his sister in Cities Service Preferred the following year.
In the decades since he has famously held on to some of the biggest name stocks in his portfolio, allowing them to build in value and reinvesting to take his holdings to the dizzying heights at which they now stand.
To invest like Warren Buffett you need to be prepared to do the same. That means you need to see your portfolio as something other than a rainy day fund to be drawn from anytime you need a little spare cash.
Instead, you should invest money you don’t expect to need again for a long long time, as this allows you to benefit the most from reinvesting dividends and from the capital gains you might make on rising stocks.
2. Buy value
Another major hallmark of Buffett’s strategy is to buy value. Independently of almost anything else influencing your buying decision, look for stocks that are towards the lower end of their value curve.
There’s little point in buying into a big brand stock when it is at its peak price, as it is much more likely to lose value from there than to break its own long-term ceiling (with some exceptions, as always).
Buy by buying a stock that is close to its minimum, you give yourself the best chance to benefit from a significant uptick in performance in the near to medium term.
While this will not always happen – and you should always be prepared to lose what you invest on an individual purchase – the greater gains you make on your successful trades should hopefully more than compensate for the occasional losses or stagnations.
3. Sell value
It’s equally important to sell based on value and not just on price. That is to say, if you only sell off your best performers based on a simple price comparison, each sale will weaken your portfolio as a whole.
Rather, to invest like Buffett you should hang on to those biggest names, especially if they continue to pay reliable, regular dividends that you can either reinvest or withdraw from your portfolio as disposable income.
When you are looking to sell stocks, look instead to the more turbulent middle section of your portfolio where prices rise and fall by a greater margin compared with the price of the shares.
By offloading these more volatile stocks close to their peak price, you can generate the best proportional gains without sacrificing those top few percent of investments that yield steady ongoing value.
4. Invest with your head
Buffett’s strategy is not emotional, but it is highly personal, and striking that balance is a key factor if you want to invest like Warren Buffett has done over the decades.
For example, for a long time he was very wary of technology, and earned criticism in the late 1990s for failing to invest heavily in the boom industry of web-based businesses that were reaping huge returns for other investors.
But when the dotcom bubble burst, Buffett’s caution proved to be prudent and his reputation was restored – while his portfolio also fared considerably better than many of his counterparts.
He has profited significantly from some carefully chosen tech investments, e.g. Apple, proving that even his ‘gut feeling’ reluctance in this area can be overcome if the numbers stack up strongly enough.
It’s also worth noting though that Buffett says he will never invest in Microsoft – his real-life friendship with Bill Gates is too close to risk accusations of insider trading, so he sticks instead to making billions of dollars of donations to Gates’s charitable foundation.
5. Know your goals
Finally, know what you are aiming for. Even Warren Buffett doesn’t just aim for an ever-increasing portfolio, especially in his later years.
Buffett’s support for the Bill & Melinda Gates Foundation is just one part of his philanthropic activity, and together with his sister Doris Buffett, who is wealthy in her own right, the two run the Letters Foundation, giving support to people who face hardship that is not their fault.
Doris has said she intends to give away all of her fortune before she dies, and Warren is quoted as saying he wants to leave his children enough of an inheritance to feel they could do anything they want, but not enough that they want to do nothing.
Nobody is saying you have to start giving money away – although a few charitable donations might be a sensible part of your tax planning – but having a target gives you something to work towards and you can always re-evaluate your ambitions at a later date.
Keep driving that audacious goal higher and who knows – 80 years from now you could be one of the biggest billionaires on the planet, just like Buffett is now.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.