An Oldie But A Goodie: Investing Like Warren Buffet

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invest like warren buffet

“We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”  Warren Buffett

 

The quote above is from a letter he sent to his shareholders in 2011, explaining that he was looking to make a big acquisition.  Warren Buffett at the time had more than $34 billion in cash idly waiting for his next investment opportunity.  This is not unusual for Warren Buffett, though.  He is known to keep around $20 billion in cash, in order to buy great companies at good prices.  

 

Companies Associated with Buffett

invest like warren buffetSome of these great companies that he owns 100% are well-known companies, such as Benjamin Moore, Business Wire, CORT Business Services, Dairy Queen, Duracell, Fruit of the Loom, GEICO, Helzberg Diamonds, The Pampered Chef, and See’s Candies.  Other companies that he has major investments in are American Express, Kraft Heinz, Phillips 66, Wells Fargo, IBM, and Coca Cola. As you can see, Warren Buffett has a very eclectic portfolio.  When he sees a good deal on a great company, he doesn’t hesitate to buy.  

 

Beating the S&P500

In a previous article, I wrote about investing in the S&P 500 since mutual funds consistently underperform the market.  Warren Buffett, on the other hand, eschewed this advice and bought his first company in 1964.  Since he bought Berkshire Hathaway, he has returned 1,000,000%.  Meanwhile, the S&P 500 has returned 2,300%.  Can you believe that Warren Buffett has beaten the market by 997,700% or roughly 434 times?  I can barely fathom that number.  Needless to say, Warren Buffett is one of the greatest investors our generation has ever seen.  So, should individual investors try to emulate Mr. Buffett and hoard up cash in order to buy when when the market has dropped?

 

Ups and Downs of the Market

sale-1149344Another great quote from Warren Buffet is, “Be fearful when others are greedy and greedy when others are fearful.”  According to the Motley Fool, the market on average drops 10% every 11 months.  Based on this number, on average, as an investor, you should be able to buy stocks on sale every year.  If that’s the case, why do investors consistently buy high and sell low?  

 

One of the reasons is: since we are human, we let emotions play into our investment-related actions.  When the market is going well, there is a tendency to think the market will continue to do well for the foreseeable future.  So, we buy more.  When the market is going down, as an investor you never know where the bottom really is, so we get scared and try to get out while trying to preserve capital.  There is an old adage– the market goes down like an elevator and goes up like an escalator.  

 

The Best Investor is a Calm Investor

The common myth is that investors have to be super smart and great at math in order to excel at the stock market.  Both of these characteristics are great to have, but more important is the investor’s temperament.  Do you realize that research has shown that women are better investors than men?  Gary Dayton says this is because “women tend to be calmer, possess a longer-term outlook, do more research on their investments and remain steady under pressure.”  

 

Dollar-Cost Averaging

blackpool-1160517Let’s say that you don’t have this temperament.  What can you do as an investor to avoid some of the pitfalls from buying high and selling low?  The easiest thing to do is set up a dollar-cost averaging account.  This is a fancy way of saying buy a fixed-dollar amount each month, regardless if the market is up or down.  

 

If the market is down one month, you will be able to buy more shares.  If the market goes up the next month, you will buy less shares.  Additionally, it reduces the risk that you will buy at the time top of market since you are contributing each month.  Finally, this is a great way to remove the emotional rollercoaster of trying to determine the “right” time to buy into the market.  It allows you to remove the paralysis of doing nothing and allows you to get into the market with incremental payments each month.

 

I think timing the market is a fool’s game and would rather do other things with my time.  But, I realize that investors are always going to think that they have a unique edge in the market.  My one question to them is, if Warren Buffet invests like a girl, why don’t you?

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57 Comments

  1. Hi MSM,

    Love it 🙂 As you say the best approach is the dollar / pound cost averaging to remove the emotion. I of course don’t do that and do try and time the market. Results vary with some winners and some losers but I have noticed I spend far less time either trying to time the trackers, or even looking at their value so if you want a smooth easy ride, buy monthly 🙂

    Cheers,
    FiL
    FIREin’ London recently posted…2017-2018 (Tax) Year ahead and GoalsMy Profile

    • When I was younger I tried to time the market. But I found that I became obsessed and it was taking up too much time. It’s definitely much easier to buy on a consistent basis and forget about it 🙂

    • Hahhaha 🙂 In my fun 10% portfolio that I trade, I own some Berkshire 🙂 It’s done very well for me over the years. It’ll be interesting to see how the stock performs when Buffett steps down.

  2. Investing is a process of learning. It might take 10 years to learn how to invest. For the beginners, they are too ambitious. They earned a lot of money, but they had to return earned money to market because this money did not belong to them. I know one person whose stock account increased 100 times during last 10 years. Unfortunately, his experience does not apply to most of us.

  3. It’s about time in the market not market timing. Buffet is not.investing like you or I. It takes an elephant gun to buy an entire company and get a board seat. That’s a different type of investing then the rest of us. For the rest of us buying tiny stakes where we can’t make a company change management if needed, dollar cost averaging is really the best option. There is a reason buffet suggests it and passive investing to his wife. Simply put a value stock could just as likely be a falling knife as undervalued and you don’t have a mechanism to force a turn around.
    FullTimeFinance recently posted…Life Style Inflation’s Less Talked about DownsideMy Profile

    • Agree with this sentiment, FTF. Buffet’s amazing returns have also benefitted from the use of leverage (debt) which skews the comparison to the S&P. He’s made risky bets that have mostly paid off which is a testament to his acumen, and certainly hard to replicate.

      I’m completely fine taking that risk off the table and getting market returns via index funds. While stocks may drop 10% once a year, how much do they go up in the meantime? I don’t bother waiting for a drop, I’m focused on getting my money in the market as soon as I have it and invest for the long-term. It washes out over a 20+ year investment horizon.
      The Green Swan recently posted…Our Retirement LifestyleMy Profile

      • I’m going to pile on here. I would not not criticize Buffett as an investor but I would criticize the myth that surrounds him when it comes to stocks. Buffett bought whole companies (originally using other people’s money — family and friends) and then leveraged that cash flow (esp from insurance and reinsurance premiums) to buy more companies as well as equities.

        Of course, his stock selection has been excellent and for the most part he buys cheap, quality equities (not index funds). There was a great paper on this I think from Yale that could be found with a good Google search.
        Rich @ pennyandrich.com recently posted…The Helicopter Parenting Paying For College FINAL SHOWDOWN (or, Part 3)My Profile

    • You are absolutely right Full Time Finance!!! The minuscule stakes are not even a blimp on their radar where as Buffett owning 10% of a company can signal management’s attention in no time 🙂 Although it would be fun to be able to have that type of sway in with the board.

  4. Love Buffet. Call me crazy, but i love to keep it insanely boring when it comes to investments and building wealth. Index funds, pay down my mortgage, and stay away from consumer debt. Amazing how effective boring can be.
    ReachingTheCrest recently posted…All My Bosses Are BrokeMy Profile

    • You are very correct!!! I think Charlie Munger says it best “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”

  5. It’s hard to fathom having that much cash available to invest when the time is right. For us, we will just continue our automatic monthly contributions to our index funds and invest extra when we have extra. I’ve tried to hand pick stocks in the past without extraordinary results – so I might as well use my brain cells for something else.
    Mr. Need2Save recently posted…Can You Have Too Much Pre-Tax Money in Your Retirement Fund?My Profile

  6. Buffets the man. I would like to buy more positions in what he holds. Slowly but surely. Unfortunately I don’t have 20 just sitting in my savings account. Maybe in the future. D you automate your posts? If so what do you use? A plug in?
    Passivecanadianincome recently posted…True Financial FreedomMy Profile

    • Thanks for stopping by Passive Canadian Income!!! I think we all wish we have Warren Buffett type money sitting in a bank account.

      I use WordPress to schedule the posts. So no plug in for me.

  7. I ended up buying one of his competitors a few years back – Pepsi. It has done fine, but I like it more than Coca Cola along with the other products it offers. Still, I agree with everything he says about investing. Always better to think you’re buying companies and not stocks.
    SMM recently posted…Consider Yourself Fortunate – RetirementMy Profile

    • Thanks for sharing SMM!!! I was partial to coke back in my day but have given it up now 🙂

      I feel like my mindset completely changed when i stopped thinking about investments as stocks and instead thought of them as companies. Definitely made me think in longer terms 🙂

  8. I want to make shirts that say “Invest like a girl” for FinCon. 🙂 It’s true that women tend to be more risk-averse, so it makes sense that we pick stocks more carefully. It does suck, though, because I doubt as many women are investing as men.
    Mrs. Picky Pincher recently posted…My Favorite Money Bloggers, Part 2My Profile

  9. I have fallen into the trap of buying when the market is high and standing still when things drop. It is easy to get caught emotionally with stocks. As I try to be a better investor, these are lessons that can be learned every day. Take emotion out of it. I love reading about Buffett. He has so much wisdom to share and I love his humor.
    Mr Defined Sight recently posted…There Are Things In Life That You Shouldn’t Skimp OnMy Profile

  10. Great article! I recently wrote about a lecture that Mohnish Pabrai gave to Peking University. Patience is a key to investing. If you do not like researching businesses and being patient, the best option is DCA into indexes, preferably a value-tilted global allocation of indexes.
    Holden Alexander recently posted…The Art of Timing & Other Investing TipsMy Profile

    • Thanks for sharing!!! Researching businesses can be incredibly time consuming. I’ve spent a whole year researching companies before I finally pulled the trigger. DCA is definitely much easier 🙂

  11. I agree that market timing is simply rolling the dice. Sometimes you win, sometimes you lose. Those who win think they’re brilliant and tel everyone about it, and those who lose keep their results to themselves.

  12. Great post. My husband is a huge fan of Buffet and has read all of his annual letters. We actually watched his HBO documentary, which was interesting. There was a lot of stuff about Buffet that I didn’t know. We hold some similar investments as Buffet, but agree with others here that it’s not about trying to time the market. If you do research and find companies that are undervalued relative to the rest of the market those are the companies that should be bought and then ideally held for a long period of time as they generate returns and reward their shareholders. ‎

  13. I think that there is some validity to both approaches, you have to keep contributing consistently to the market, but you also have to know when to go all in. IE When others are fearful you buy and when others are greedy you start to get more reserved in your purchases. Right now people are greedy, so I’m contributing to my 401k, but I’m waiting to see if we get a healthy dose of fear back into the market and get an opportunity to scoop up some additional quality companies.

    • Thanks for sharing Duncan!!! It will definitely be interesting to see how far the market pulls back when it eventually does. History at least says it will 🙂

    • Thanks for sharing Jack!!! My wife before we got married squirreled away a ton of money as well. I was like where did all of this come from 🙂 She had barely graduated from college so needless to say I was impressed.

  14. Buffett is one of the greatest investors in history. What I like about him is that he airways has some good advices to the average people. Advices that don’t require any investment knowledge and that anyone can follow. Simple, regular investing practices and patience. What else you need?
    Roadrunner recently posted…Dividend Elves in ActionMy Profile

    • He’s really great and I’m definitely a huge fan 🙂 Now if only we could get him to run the Treasury and get rid of some of the exotic things that they do on Wall Street.

  15. Ha, I just wrote a post about Buffett yesterday! I’ve read the book Snowball (about his life) and watched the HBO documentation too. I really like reading his letter to shareholders. I’ve been a follower of his for many years, since I first read about him in magazines and books. P.S. I do invest like a girl! 🙂 Index funds for the win
    Liz@ChiefMomOfficer recently posted…Investment Wisdom in Buffett’s Letter to ShareholdersMy Profile

  16. I think actually, that dollar cost averaging is a mistake. it’s market timing. Since the market goes up 77% of the time, you are betting against the market when you dollar cost average. I only dollar cost average because that’s how I get paid. However, I am receiving a lump sum bonus tomorrow on my check. How am I going to invest this 8k amount? Yup, all at once.

    I do agree though, that index fund investing is a good idea.
    FinancePatriot recently posted…So you wanna be a baller like Ivanka Trump? Frugality vs. Side Hustle- only one clear winnerMy Profile

    • Thanks for sharing FinancePatriot!!! I had a professor in college explain that he dumped all his money in at the beginning of the year since he wanted the dividend payments. I probably should do a little more research around dollar cost averaging 🙂

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