Though he celebrated his 92nd birthday in August 2022, Warren Buffett has no plans to retire. Over the course of his 80 years in the stock market, Buffett built a massive personal fortune that tops $108 billion, and he has grown his holding company, Berkshire Hathaway, from a struggling textile manufacturer to a colossal conglomerate with a market cap of nearly $680 billion.
A large portion of Berkshire Hathaway’s $680 billion in assets is held in the company’s $354 billion stock portfolio.
Why Is Berkshire Hathaway A Good Investment?
Berkshire Hathaway’s Class A stock is the most expensive in the world, priced at more than $466,000 per share, and it is widely considered one of the most reliable blue chips on the New York Stock Exchange.
Since the shares started trading, they have delivered returns of 60,518 percent, which is far beyond the returns of the S&P 500 for the same period.
Fortunately, smaller investors aren’t excluded from buying Berkshire Hathaway stock. Though Class A stock might be out of reach, Class B stock is available at just over $308 per share.
However, simply buying Berkshire Hathaway stock isn’t right for every investor. Some want to leverage Warren Buffett’s investment strategy to trade securities not included in Berkshire Hathaway’s portfolio.
How Does Warren Buffett Invest In The Stock Market?
The good news is that Buffett is generous with insights and advice on how to choose the best stocks. He still keeps a close watch on every trade in or out of the Berkshire Hathaway portfolio, and he remains deeply involved in the analysis of individual companies, various industries, and the market as a whole.
Buffett measures every potential trade against the core criteria that have guided him for decades – the same criteria that have ensured his extraordinary success. Here’s how to invest like Warren Buffett.
Warren Buffett Quote: “Never invest in a business you cannot understand.”
New tech startups might promise to transform the world, and complex conglomerates might bring in high profits, but if you don’t understand how they make their money, give the stock a hard pass.
Among other reasons, it is impossible to make accurate predictions about the company’s prospects or determine how changes in the industry or business might affect revenues without a deep understanding of how the organization operates.
Warren Buffett Quote: “You can’t buy what is popular and do well.”
In other words, don’t follow the crowd. It’s common for a bit of good news or a sudden burst of media attention to prompt investors to buy stocks they might not otherwise due to a fear of missing out. That’s a mistake, as it is nearly always impossible to get in on the trend before the stock becomes overvalued.
Conversely, when fear pushes stock prices way down, it’s an ideal opportunity to get great bargains on undervalued companies.
Warren Buffett Quote: “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
Buffett explained his perspective on competitive advantage as resembling a moat, much like those that once protected castles from invaders. The wider the moat, the more difficult it is to breach.
The same applies to competitive advantages. Buffett chooses companies that have extensive, multi-faceted competitive advantages that would be difficult – if not impossible – for competitors to duplicate.
Warren Buffett Quote: “Our favorite holding period is forever.”
Warren Buffett doesn’t make short-term trades. He always has the long game in mind. Through careful analysis of business fundamentals, he evaluates a company’s likelihood of long-term success in making a buying decision.
One of the key metrics he uses in this evaluation involves estimating the company’s earnings range – but not for a mere 12 months like other analysts. After all, any company can boost short-term profits, but that doesn’t mean they are capable of long-term success.
Instead, he first determines whether it is possible to make a reasonably accurate estimation of earnings over a five-year period. No guessing – his calculations are based on research and analysis of the organization, the industry, and the future of the economy. Once Buffett is confident in the estimated earnings range, he will consider buying shares – but only when they are available at the lower end of the estimated earnings range.
Warren Buffett Quote: “The three most important words in investing are margin of safety.”
Why does Warren Buffett insist on buying shares at the lower end of the five-year estimated earnings range? Because it’s a strategy that increases the margin of safety. Trading stocks doesn’t come with a guarantee, and even the best companies run into unexpected challenges.
At best, keeping the purchase price low enhances returns over time. At worst, it reduces the impact of miscalculations in earnings estimates and sub-par performance.
A Final Note On Warren Buffett’s Strategy
Warren Buffett’s checklist for buying stocks is simple and straightforward. Buy quality companies with large moats at bargain prices, then hold them forever.
However, Buffett has been known to reduce or close positions in his portfolio from time to time. Yes, he prefers to invest in companies that will produce reliable returns over time, but even the best research and analysis aren’t enough to accurately assess a company’s future in every case.
When Buffett realizes that an asset is unlikely to perform as expected, he rarely takes a “wait and see” approach. According to Buffett, “The most important thing to do if you find yourself in a hole is to stop digging.” In short, when socks fail to perform, it is best to cut losses and move on to a more profitable asset.
Bonus: Warren Buffett Checklist
- Management Quality: Look for leaders who demonstrate integrity and commitment to service before personal incentives
- Wide Moat: The company should have a sustainable competitive advantage that capital alone can’t breach – think Coca Cola’s brand advantage
- Strong Balance Sheet: Low debt or low debt-to-equity ratio is preferrable
- Stable Cash Flows: If the company is operating efficiently and with predictable revenues, cash flows should be strong, stable, and growing
- Dividend Growth: While Buffett doesn’t pay a dividend, he likes to buy stocks that pay dividends and increase them regularly
- Favorable Price: No matter how good the fundamentals, Buffett likes to buy stocks that have attractive prices relative to earnings, book value and cash flows.
- Reinvestment: Buffett favors companies that reinvest in widening their moat, as well as those that use excess cash flow to buy back shares, which increases his proportional ownership in the firm.
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