Even if you don’t invest, you’ve likely heard of Warren Buffett. He’s one of the world’s richest people and a stellar businessman and philanthropist. He’s also been involved with some of the world’s most influential people, including Bill and Melinda Gates.
Most people know of Warren Buffett because of his success in investing, and they want to mimic what he does to reach even a fraction of his net worth. But how do you invest like Warren Buffett? Is it even possible?
Here’s some background on Buffett and his investment strategies to help you understand more about him.
Before we get started, here’s a little Warren Buffett quote to get you going:
‘Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.’
Warren Buffett’s Background
Warren Buffett’s investment strategies started when he was just 11 years old when he bought his first stock and read every investment book on which he could get his hands. Then, throughout middle and high school, he worked a paper route and used the money to invest in 40 acres of land he rented to earn income.
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After high school, he attended three colleges, including the University of Pennsylvania, the University of Nebraska, and Columbia Business School. At Columbia Business School, he met Benjamin Graham, the founder of value investing.
His history with Graham didn’t start immediately, though. Graham was his professor, but he refused to hire Buffett for a few years after graduation. Once he changed his mind, Buffett hit the ground running, using Graham’s idea of value investing (buying assets at much lower prices than their value) and expanding it.
After a few years of working with Graham, Buffett went off on his own, launching Buffett Associates, where he quickly became a millionaire.
It was then that Buffett joined arms with Charlie Munger, who helped Buffett use the theory of value investing, but as a means to make something out of dying businesses rather than just squeezing the last few dimes out of them.
Why Warren Buffett is Famous
So just, why is Warren Buffett famous?
Here are some of his top achievements:
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- He capitalized on the concept of value investing, buying companies selling for much less than their intrinsic value to turn them around and make them profitable.
- Founded Buffett Associates a few years out of grad school, which had seven partnerships in three short years.
- Bought and took control of Berkshire Hathaway, taking it from a struggling company to one of the largest holding companies in the U.S.
- Donates 99%+ of his net worth to charity, including the Bill and Melinda Gates Foundation.
Warren Buffett’s Investment Philosophies
Since his start in the investment world, Warren Buffett has always focused on value investing. He strongly believes investing in low-cost index funds instead of active investing is the way to go.
In fact, he felt so strongly about it that he entered a bet with the Protégé Partners of New York City, a hedge fund company. Buffett’s argument or the bet was to prove that index funds could beat active investing.
The bet was a 10-year-long bet. It started on January 1, 2008, and ended on December 31, 2017. The bet said that the S&P 500 would outperform a portfolio of five hedge funds.
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Buffett’s bet won big time, with the hedge funds showing a return of 36.3% and the S&P 500 a return of 125.8%.
His point was that actively managed funds have fees that decrease profits. There’s only so much money to be made in the industry, and if you’re spending all the earnings on fees, you will only walk away with lower profits.
So how does Buffett decide which stocks to buy in today’s markets? He uses two simple philosophies.
- Determine the company’s earnings potential for the next five years – You don’t have to be a financial expert to do this. First, look at the company’s financial statements, evaluating its history, the market, and how competitors are doing. Next, look at the industry trends, and see if the company is at the peak or valley. Companies at the top of their industry are more likely to continue doing well.
Remember, as Buffett said ‘Price is what you pay, value is what you get.’
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- Buy stocks at their lower end – It might feel impossible to know when to buy stocks at their lower end, but focus on the price-earnings estimate. Focus on stocks trading at a price-to-earnings estimate lower than 19.6, the S&P 500’s average earnings.
- Hold onto stocks for the long-term – As Buffett said ‘If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.’
Should you Copy Warren Buffett’s Strategies?
Whether you should follow Warren Buffett’s strategies depends on a few factors. First, note that you likely don’t have a fraction of his net worth or resources. As a result, he has many more opportunities to understand what’s happening in the market than the average investor.
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Buffett invests for the long term, usually ten years or longer. If you want to invest like him, you’ll need a time horizon of at least ten years.
Other practices you should follow include:
- Don’t invest in a company unless you know and understand its earnings model
- Get alerts for low stock prices and jump at the chance to invest in them
- Consider going against the grain and buying when others sell and selling when others buy
Final Thoughts
We could all only be a fraction of what Warren Buffett is, no matter how much money we have. He has many years, resources, and dollars on the average investor, but that doesn’t mean you can’t model your life after him.
Warren Buffett has always gone against the grain when investing. He doesn’t subscribe to diversification and only invests in passive assets, forgoing the expensive fees of active investments. He is also a world-renowned philanthropist giving away most of his net worth to causes that he believes in without a second thought.
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If we all lived like him, even 5% of our lifetime, the world would be a much better place, and more investors would have a robust and profitable portfolio. So I leave you with this Warren Buffett quote
‘Risk comes from not knowing what you are doing.’
