3 secrets to investing like Warren Buffett

2 min read

Every investor looks in the mirror and wants to see Warren Buffett.

The Oracle of Omaha has a reputation as one of nation’s wise men, someone presidents, philanthropists and bankers all turn to for advice.

Buffett has cultivated a folksy, man-of-the-people persona. He has lived in the same Nebraska home for decades, and he loves Coke, Dairy Queen and March Madness. His clout ultimately stems from his position as a very successful investor, one of the wealthiest in the world.

Fans flock to his annual shareholder conference and closely monitor which stocks he loves — and which ones he’s selling.

You will (probably) never be as rich as Buffett, but you can fatten up your bank account if you follow some of his advice and tactics.

1. Keep your investments simple

A decade ago, Buffett made a $1 million wager with hedge fund manager Ted Seides. The bet boiled down to a fundamental question: Can professional investors beat average market returns over time? Buffett went with a low-cost mutual fund that tracked the S&P 500 index, while Seides chose a handful of actively-managed funds that invest in a bunch of hedge funds.

Who won? Buffett, of course. The annual return, net of fees, for the S&P 500 fund bested its collection-of-hedge-funds rival by nearly five percentage points. Seides, undeterred, has proposed going double or nothing.

Buffett’s strategy was nothing new for him. He has always trumpeted low-cost mutual and exchange-traded funds as the best investment vehicles for the average person. That’s even how he wants his children to invest.

You can establish a diversified portfolio with just a few index funds, or take a completely hands-off approach with a balanced or target-date fund. For additional safety, sprinkle in some certificates of deposit.

2. Be very picky with individual stocks

A riskier approach is to pick stocks based on a Buffett-like strategy. Don’t try this with more than 5 to 10 percent of your portfolio.

Buffett is known for his “value tilt”: He wants his Berkshire Hathaway holding company to buy up solid businesses for less than they’re worth.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” is something of a mantra for Buffett and his second-in-command, Charlie Munger.

Buffett isn’t looking for the cheapest bargains but for companies with good future cash flows, return on capital and intrinsic value, or brand. He loves companies like Coke that tell a good story and are so deeply intertwined with their customers’ tastes that any competitor will have a hard time making up ground.

When no good option appears, Buffett will pile up cash, as he’s done recently.

These guidelines have helped Berkshire beat the S&P 500 by nearly 10 percentage points annually since 1965.

3. Don’t be afraid to stumble

This one is easier said than done, but even Buffett makes mistakes. He has been a big fan of Wells Fargo, the San Francisco-based banking behemoth mired in scandals, as well as IBM, the technology giant that has seen declining revenues for the past five years.

Buffett also famously missed out on Amazon and Google, and this year he admitted defeat on his Wal-Mart gambit.

Rather than dedicate a small active portion of your portfolio to picking stocks the way Buffett chooses companies, you might simply buy shares of Berkshire Hathaway.

While you may never be Buffett, you could at least own some of his future success.