Warren Buffett’s Investment Strategy, Explained With Buffett Quotes & Stocks

Dylan Lewis: Warren Buffett is arguably the most
respected investor of all time, and for good reason. In his 54-year tenure as CEO of Berkshire
Hathaway, Buffett has delivered annualized returns of over 20% for investors as of mid-2019,
more than twice the pace of the S&P 500 over the same period. And he’s done it
without applying any extraordinarily complex methods. In fact, Warren Buffett’s
investment style is surprisingly simple. In this FAQ video, we’re going to break
down how the “Oracle of Omaha” invests by looking at his current and past holdings
and some of our all-time favorite Buffett quotes. One of the most important things you need
to know about Warren Buffett is that he invests for the long term. Perhaps my favorite Buffett quote of all
time is, “You can’t produce a baby in one month by getting nine women pregnant.”
In other words, some things just take time. The first thing you need to do if you want to invest
like Warren Buffett is to stop chasing short-term gains. Buffett doesn’t judge is invest performance
by looking at how well his stocks did over the past week, month, or even year.
Instead, he focuses on multi-year returns. In fact, Buffett doesn’t even buy stocks because
he thinks their share prices are going to go up. He focuses on buying good
businesses that are well run. This is certainly worked out in his favor,
as Berkshire Hathaway’s investment returns speak for themselves. As Buffett says, “If you aren’t willing to
own a stock for 10 years, don’t even think about owning it for 10 minutes.” While there are certainly exceptions,
Buffett approaches all investments as if he’s going to hold them forever. There’s another
commonality with all his holdings. If you look at Berkshire Hathaway’s current
stock portfolio, especially Berkshire’s largest holdings, you might notice that
there isn’t a ton of variety. Specifically, among Berkshire’s top 10 holdings,
you’ll find no fewer than seven banks, as well as two large
investments in food companies. Apple is the only stock
not in those two categories. Many observers might say that Berkshire’s
portfolio lacks diversification, and that’s true; however, Buffett believes
that’s not necessarily a bad thing. In fact, you could say that the lack of diversification
is responsible for Buffett’s best investment returns. Simply put, Buffett feels it’s better to have
an undiversified portfolio made up of businesses he understands than to have a diversified
group of stocks he isn’t well equipped to evaluate. Buffett doesn’t understand technology stocks
as well, so you don’t find very many in his portfolio. He refers to this concept as
“staying within a circle of competence.” As he says, “You only have to be able to evaluate
companies within your circle of competence. The size of that circle is not very important.
Knowing its boundaries, however, is vital.” In other words, if you know banks well, as
Buffett does, there’s absolutely nothing wrong with owning a lot of bank stocks. Having a deep knowledge of the space gives
Buffett a better sense of the actual value of the businesses he’s holding, and he’s one
of the most notoriously value-oriented investors in the business. As Buffett likes to say, “Price is
what you pay, and value is what you get.” The basic concept
of value investing is simple. By investing in stocks that are trading for
less than they’re truly worth, you have an inherent advantage as a long-term investor. However, finding stocks that are trading at
a discount is easier said than done. A full-scale discussion of value investing
is a little beyond the scope of the video, but if you want to learn how to invest like
Buffett, the best place to turn are the teachings of Ben Graham, Buffett’s mentor. Buffett himself has referred to Graham’s book
The Intelligent Investor as the best book on value investing ever written. Now, you may be wondering, what characteristics
does Buffett actually look for in businesses? It’s difficult to overstate how much value
Buffett gives to outstanding management. In his mind, a great shareholder-friendly
management team can make an otherwise so-so stock pretty attractive. Conversely, and otherwise excellent business with
a poor management team can be a losing investment. Look for companies with a strong track record
of raising dividends and whose management team has their interests aligned
with those shareholders. For example, here at The Fool, we like to
see incentive-based compensation tied to long-term performance goals as opposed
to a single quarter’s earnings. Another concept that’s important to Buffett’s investing
style is identifying durable competitive advantages, often called moats. For example, Apple’s loyal customer base gives
the company a big advantage going forward, and is a big reason why the
stock is Berkshire’s largest holding. Coca-Cola has a massive distribution network
and one of the best-known brands in the world, the combination of which gives it efficiency
advantages and pricing power over some of its peers. While Buffett does tend to have long-term
relationships with the stocks he buys, he also isn’t totally wed to them. Buffett once said, “All there is to investing
is picking good stocks at good times and staying with them as long as
they remain good companies.” Pay particular attention to the latter part of
that quote — “as long as they remain good companies.” While Buffett is certainly a buy-and-hold
investor, he sells stocks regularly and for a variety of reasons. If Buffett’s original reasons for buying a
stock no longer apply, he won’t hesitate to move on. As an example, it might surprise you to learn
that Buffett built up a pretty large stake in Freddie Mac in the 1990s. By 1998, Berkshire owned nearly 9% of Freddie
Mac, a stake worth $3.9 billion at its peak, and a massive 1,200% return for Berkshire. However, in 2000, Buffett abruptly
sold nearly all of his position. Why would he get rid of
such a successful investment? Well, Buffett noticed that the management
team was becoming too focused on delivering quarterly results, and they were starting to take
on more and more risk to achieve those goals. As we all saw during the financial crisis,
these risks ended up being more than just a small warning sign. The lesson: don’t be afraid to walk away from
an investment if you don’t like what’s going on, regardless of whether
that stock is up or down. Buffett said it best when he advised,
“The most important thing to do if you find yourself in a hole is to stop digging.” Some of the best Buffett quotes really good
at the psychology of investing and maintaining a level approach even
when things go haywire. Many investors fear market crashes,
and it’s not hard to see why. Nobody enjoys watching the value of their
investments plunge, and high volatility can certainly be scary. But Buffett has frequently advised investors
that these are some of the best times to buy. In his words,
“Opportunities come infrequently. When it rains gold,
put out a bucket, not a thimble.” In fact, some of his most successful investments
have come during and shortly after market panics. For example, Buffett’s $5 billion investments
in Goldman Sachs and Bank of America in the wake of the financial crisis
have turned out to be massive winners. Having said that, market panics are only good
for long-term investors who are in a position to take advantage. This is one of the big reasons why Buffett
likes to have a decent amount of cash on the sidelines at all times, and why Berkshire avoids debt.
As Buffett says, “Predicting rain doesn’t count. Building the ark does.” All of the Buffett wisdom that we’re pulling
into this video comes from decades of experience and thousands of pages
of reading on his part. Buffett doesn’t spend his workday sitting
in meetings or watching the financial news, or really even analyzing stocks that much. Instead, the activity that takes up
the most of his time is sitting and reading. He regularly reads hundreds of pages a day
and has said, “That’s how knowledge works. It builds up like compound interest.” He believes that the more knowledge an
investor gains, the better position they’ll be in to make wise decisions
and avoid making mistakes. To recap, you can simplify Buffett’s
market-beating strategy down to a few core things: • investing for the long term,
• buying good businesses that are easy to understand, • looking for strong
management teams and companies with durable competitive advantages,
• viewing market dips as opportunities, • and learning; always learning. If you want to do some more learning on Buffett,
this video is based on a fool.com article. You can catch the link for
that down in the video description. If you want some good entry-level investing content,
we’ve got a starter kit available at fool.com/start. It walks you through all things investing,
from saving money to buying your first stock, and it has a five-stock
sampler to get you started. If you liked the video, let us know by
giving us a thumbs up and subscribing. If you have a favorite Buffett quote, drop
it down in the comments section below.

12 Replies to “Warren Buffett’s Investment Strategy, Explained With Buffett Quotes & Stocks”

  1. Just in time before I get in to this big venture with my partner. Your video definitely paved the way to strategizing our approach better. Thank You

  2. Lol. we used to use the Buffet quote about you can't make a baby in 1 month in a tech company I used to work at when the CEO was pushing for significantly faster software delivery times. Fortunately for us he was a big investor and the quote helped him cool down a little <g>

  3. This explains then why he rains down on cryptocurrency. That is not within his "circle of competence". He should do himself a favor and get competent. Derrick has….

  4. If you want to invest like Buffet just buy Bershire Hathaway shares rather than listen to Motley idiots that try to explain how Buffet did it

  5. Wow i Love the rude comments about Buffett and how he needs to change with the times or how Motley Fool are idiots. Lol seems to me there all well off ,millionaires,or in Buffet's case one of the top five riches people on earth. Jealousy is fools Gold. I'm personally very Grateful for these mentors and what i get out of every Book ,Podcast ,Video or paid Subscription and even all the Great free advice.

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