INVESTOR’S CHOICE: Invest the Buffett Way
Does the legendary Warren Buffett need any introduction?
We all know who the billionaire CEO of conglomerate Berkshire Hathaway is. As one of the most successful value investors of all times who many aspire to replicate his success, Buffett has managed to devise a devastatingly successful set of investing principles.
And the good news is here’s how you can build a stock portfolio with the same principles Buffett uses to choose stocks and apply them to your own investment strategy.
So, let’s get deep into value investing and built yourself your own “Buffett stocks.”
First of all, only invest in what you know.
While Berkshire’s stock portfolio and subsidiaries represent a diverse mix of companies, Buffett has historically avoided most tech stocks and this is why: He prefers to stick with what he knows best, and so should you.
Or at the very least, before investing in any stock, you should be able to understand how the business works and why it’s profitable. You can potentially get into any business and learn to understand it very well until you’re willing to put a great deal of capital into them.
If you’re reading this, it’s because you have the drive to invest and to learn the basics of value investing. And you definitely need to be learning this as soon as possible.
This is one of the reasons why Buffett recommends sticking to low-cost index funds.
Most people don’t have the desire or knowledge to invest the right way when evaluating and picking stocks, even when it can be more profitable than funds. So, before you can go the “Buffett way” you’re going to need serious commitment to gather the necessary knowledge for value investing.
Focus on building an excellent foundation for evaluating stocks and finding overlooked value in the market and remember Buffett’s words:
“What is smart at one price is stupid at another.”
Which leads us to our next strategy: learn to identify cheap stocks.
After you’ve managed to develop a reliable value-investing criteria, you’ll want to make a list of stocks that fit your style.
This completely depends on your previous research. The more you know about stock valuation, the better your picks will be.
But cheap stocks are not everything if the business behind them won’t stand the test of time. After you make your list and it looks attractive metric-wise, only go for the ones poised to weather the storms of recessions.
Everything that’s dependent on a strong economy is something you don’t want to put your money in.
Long-term projection and entry-level barriers for competitors are the advantages you’re looking for in order to commit to an investment. Look for the things that give the business an edge over the competition, whether it’s a distribution network or a proprietary technology. Whatever improves efficiency and scale are good indicators.
This strategy connects with two definitive points that you’ll want to embrace if you want to replicate Buffett’s success.
The first one is, contrary to common belief, go hard on a bear market.
Or even better, don’t time the market at all if you’re going for long-term investing.
Always look for good opportunities during contractions and recessions and learn to love market corrections, as they offer the best opportunities. Buffett invests in good and bad times and says:
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”
Keeping in line with this, you also want to keep a long-term mindset.
If you can’t see yourself owning the stock for years, don’t buy it at all. Just like Buffett says, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
Now, we’re not saying that you should keep your stocks forever since there are many good reasons to sell, but this is the mentality you need to have going into an investment.
Buying stocks based on their next quarter, or anticipating a hot release just around the corner, is not how Buffett invests.
And last but not least, the best investment you can make is investing in good management.
To put it simply, management is a deal-breaker for Buffett. Only invest in a project where you can trust that the management team will act in the shareholder’s best interest.
Excellent reputation and real commitment to the project are a must when considering a management team worthy of your attention and money. The very same Buffett has bought and sold numerous investments solely based on management actions.
And there you have it, the most essential and important guidelines for value investing the Buffett way.
Not a piece of cake yet, right?
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