Legendary investor Warren Buffett built his reputation on developing a proven model for selecting quality stocks and making smart investments. This has led to Buffett beating the market by an almost absurd margin over time.
Followers debate the merits of following his method to a T or forging your own path based on his sound and freely given advice. Does it make sense to buy what Buffett is buying, or do it yourself? Let’s explore the options.
Investing with Buffett
The easiest way to invest like Buffett is to invest in Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) stock. Buffett himself likes the idea that individual investors can benefit from stock market movements by investing in a stock market S&P500 index fund, but by investing in Berkshire Hathaway you can benefit from Buffett’s investment wisdom without having to do the work yourself. Of course, you can also buy Berkshire Hathaway shares in addition to others.
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Picking the same stocks as Buffett isn’t necessarily the best way to go, unless you’re buying shares of Berkshire Hathaway. That’s because Berkshire Hathaway is much more than its stock holdings. Did you know that as a holding company, it owns more than 60 companies, including the BNSF railroad and Benjamin Moore Paints? There is a lot involved in Buffett’s decisions, as a manager of other people’s money, that is inconsistent with each individual investor’s investment strategy. For example, Buffett likes to buy stocks that pay dividends. That’s partly because a company that pays dividends is committed to its shareholders and usually has tons of cash on hand. But it’s also because Berkshire owns millions of shares of the companies it invests in and receives billions of dollars in dividends annually from these investments alone. With that money it can do many things that are beneficial to the company and its own shareholders.
The average investor can gain a degree of diversification by investing in Berkshire Hathaway stock, but you may want to take it a step further and use Buffett’s sage advice to create your own investment plan.
Invest like Buffett
Buffett is quite clear about what to look for when buying a company or its shares. He looks for what he calls a great company, and he has said repeatedly that a great company is defined as excellent, honest management and, most importantly, a long-term competitive advantage. He also aims for varied income streams and a focus on cash generation.
It’s not just that. Berkshire took three new positions in the second quarter, all in homebuilding stocks. That’s not just because each of these happens to meet its criteria. It’s clear that Buffett sees a trend, and he seizes the opportunity to capitalize on it.
Individual investors can follow the Buffett playbook to profit from these or other trends by finding stocks with these characteristics. An advantage to doing it yourself is that you have more flexibility to take quick action if you own shares yourself. Because there are more factors that Berkshire Hathaway has to consider when it takes or sells a position, it may not change its position as quickly even if market conditions change.
Although Buffett has said his favorite investment period is forever, investors shouldn’t take that as dogma. Buffett is constantly selling stocks and recommending others to do the same. “There is no rule that you have to invest money where you earned it,” he has said. “Indeed, it is often a mistake to do so.”
Take advantage of market dynamics
Another characteristic that is important to Buffett is that a stock is not overvalued. So while you can’t control market forces or their impact on stocks, you can look for opportunities to buy stocks at great prices. When stock prices rise too high, this could be your signal to sell. But when prices are low, you can find great investment opportunities. Another popular Buffett-ism is “be fearful when others are greedy, and be greedy only when others are fearful.”
Investing in an index fund or Berkshire Hathaway, plus your own stocks that meet your personal goals, is an excellent strategy to maximize potential while minimizing risk.
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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.