His life is simple, his journey inspiring. And his investing style? Evergreen. But how to invest your money like Warren Buffett? These 6 tips will get you started.
1. Think long-term and distance yourself from emotions
Warren Buffett is among the top five wealthiest people in the world. With a net worth of more than $68 billion. The Oracle of Omaha built his investing empire from scratch with a humble $10,000. Today he runs the multinational conglomerate Berkshire Hathaway, which includes subsidiaries like GEICO, NetJets, Heinz and See’s Candies. It’s unarguably one of the most impressive winning spells in business.
He often shares his wisdom and expertise in his shareholder letters and interviews. This sets him apart from other accomplished names in the business.
In a recent HBO documentary, ‘Becoming Warren Buffett’, he reminds us of his famous quote:
If you follow his buying pattern, you’ll notice he always sticks to this rule. Buffett believes the buy-and-hold strategy is the best. But you need to invest in the right type of company.
Some pointers to keep in mind:
- Pick companies with recurring high returns, because they continue to perform well for decades to
- Look for undervalued companies. Some of Buffett’s investments include household brands, reflecting everyday consumer needs. Like batteries, insurance, banks and grocery stores for example.
- Stay in an investment for at least 5 years to see returns.
Also, avoid tracking your investing portfolio too often. People despise losses more than they enjoy gains, according to a behavioural condition called loss aversion. The market fluctuates every day. If you see your investment dip? You might panic and sell.
So, think long term. Distance yourself from emotions. Invest in products that are an integral part of your life will keep performing well in the long run. Because even in a recession, you’d still need them.
Like Buffett says:
2. Educate yourself
One of the first books Buffett read on investing was at the age of 7. He borrowed ‘One Thousand Ways to Make $1,000’ from a local library. One idea in particular, fascinated him.
A penny weighing scale.
The idea was as simple as effective: a penny each time you want to weigh yourself. He sat down and did the math: ‘How much money would one penny weighing machine bring me? And what about a thousand?’
Reading is a key habit of many successful leaders. Even today, Buffett spends five to six hours of his day just reading. As an investor, reading company’s balance sheets, income statements and quarterly reports can help you to analyse and map out the growth of a company.
But don’t stop there. Read all top newspapers, like Buffett does. Buffett says reading builds up knowledge, like compound interest. In the HBO documentary, he talks about the times he just sits and thinks silently for hours about solving investment problems, which he believes are simpler than human problems.
3. Stick to what you know
You’ll often hear Buffett talk about sticking to your ‘circle of competence’. It essentially means you should only invest in companies and sectors you understand. If you look at Buffett’s top investments, Coca-Cola, Walmart and ExxonMobil Corp, you will notice the trend of putting money into simpler business models with an easy-to-understand process of making money.
Buffett purchased a large stake in Coca-Cola because he understood the business model and its product. Conversely, if you were to tap into companies that you know little about, you would end up speculating their growth and run into problems with managing that investment.
Buffett also stays away from technology and biotech stocks. Because of their short-term track records and frequently changing landscape.
So, in his words:
4. Don’t diversify too much
A commonly heard phrase in investments is to diversify. Buffett thinks otherwise.
It’s not easy to have a deep insight about numerous stocks across several industries. His advice: stick to your best ideas. Instead of buying a little of this or that, once you’re convinced about a company, buy in bulk. Like Buffett, who placed big bets on a handful of companies like Coca-Cola and American Express.
Coca-Cola has been giving steady and increasing dividends since 1893. And it has a huge competitive advantage because of its presence in more than 200 countries.
So, pick a few companies with business models that can boom for decades and have sound stock valuations. Once you’re comfortable with their earning power, bet big.
5. Study your mistakes
Charlie Munger, Buffett’s right-hand man and Berkshire Hathaway’s chairman, says Buffett is successful because he is brutal at judging his past.
Unlike many major publicly traded companies, Buffett’s shared his failures in his shareholder letter of 1989. He talked about his mistakes from the first 25 years, including the buying-in control of Berkshire Hathaway. Although he knew the textile business was gloomy, he was lured by the cheap price tag.
His strategy was to buy the stock at a low price and drop off at a decent profit. But he knew the long-term performance of the business might be bad. Buffett calls this the cigar-butt approach. Because a cigar-butt has one puff left without much smoke.
The CEO of Berkshire Hathaway at the time offered to buy Buffett’s stake in the company. He offered $11.50 a share, but the price dropped to $11.375 when the offer ultimately came through. Buffett decided to buy more shares even though he was getting a 52 percent return on investment. He and his partners ended up buying the company, which he believes was a bad move.
In his letter, he said it’s much better to buy a wonderful company at a fair price, than a fair company at a wonderful price. That has been his investment principle since.
6. Start investing with a small amount of money
Are you new to investing? Or you don’t have a lot of time? Then it’s a good idea to stick with index funds, exchange-traded funds or mutual funds.
Let’s delve into them.
Indexes like Standard and Poor track 500 large American companies. These are not actively managed. You don’t have to spend hours researching and analysing stocks. When you invest in index funds, you are investing in the entire range.
If you can’t buy enough stocks and bonds to build a solid portfolio, pool your money with other investors. That’s the idea of mutual funds. Spreading your money across several investments to reduce risks. Your minimum investment can be as small as $100 a month.
Like the name suggests, these are traded on a stock exchange. ETFs are a form of index funds, but fund companies don’t directly sell them. You must hire a brokerage firm to buy and sell these shares.
Buffett believes that you should never put all your money into an index fund at once. Spread it out over a longer time-frame instead. This will give you higher returns than actively managed funds.
Key differences to keep in mind:
- – Unlike index funds, mutual funds are professionally managed.
- – ETFs have a small advantage of lower fees compared to mutual funds.
- – Index funds and ETFs are more tax efficient than actively managed mutual funds.