Warren Buffett’s Favorite Way To Invest

Warren Buffett’s Favorite Way To Invest: People pay attention to what the Oracle of Omaha does.

As one of the most famous billionaire traders in the world, Warren Buffett has a unique “folksy” appeal to people, especially those who are interested in making money in the markets. “How does he do it?” they ask themselves.

Well, this investor is stoically traditional in specific ways. His unique example provides an alternative to the variety of get-rich-quick schemes that continually juice the market, or the take-no-prisoners attitude of the average hedge fund manager.

Warren Buffett’s favorite way to invest is different from what you’ve heard before, if you’ve only been paying attention to the Wall Street consensus that insists you always, and only, need to be focused on big gains.

But first you need to know what he recommends his wife do when he’s passed on.

How Does Buffett Advise His Wife To Invest?

Buffett likes to have money concentrated in a narrow band of stocks and owns a diverse group of businesses too.

While he started narrowly owning just a textile business, he has amassed so much wealth now that he doesn’t like putting all of his eggs in the same basket, for the simple reason that you become dependent on a particular company or stock. He talks about this in interviews, and it shines through in many of the moves that he has made over the years.

In fact, analysts make a lot out of Buffett’s assertion that he wants his wife to put his money into assets that track the S&P 500 after he dies, rather than continue investing in Berkshire Hathaway, his own actively managed firm. If Berkshire is so great, and his own brain child, why go to a broader investment base?

That idea speaks to Buffett’s commitment to diversification and profit-taking over time. He continually tells young traders that nothing stays the same forever, and that markets change, while also challenging some of the conventional ways that traders think.

Another primary reason for recommending that his wife selects the S&P 500 vs Berkshire Hathaway Is the CEO risk. Buffett has famously been concerned that the success of any company is at all times just one poor CEO away from being hired. If a poor leader were to ascend to the Berkshire thrown his legacy and the company itself may be at risk whereas if the odds of 500 poor leaders taking charge of all 500 S&P 500 companies is extremely low. 

Buffett Invests When ROI Is Predictable

Time and time again, Buffett leaves alone new flash-in-the-pan types of stocks and equities, and heads for traditional button-down companies that provide predictable returns on investment. Airlines. Banks. And Coca-Cola (KO).

He keeps the appeal of his stock holdings simple – established companies that sell a good product or service. Ideally the company has a moat which may take the form of a low-cost advantage like Walmart (WMT), or a brand advantage like Coca Cola.

Case in point: Buffett’s much documented devotion to Apple. In recent years, Buffett has underscored his money moves by explaining that he has a certain attraction to Apple, that he considers it to be a perennial winner on the order of railroad stocks, which he also holds.

After selling $11 billion of Apple recently, Buffett still has over $100 billion invested in the company. In addition, in interviews, he hints at suggesting the trimming of his Apple stake was probably a mistake. Buffett has a lot of good things to say about Steve Jobs, Tim Cook, and Apple’s leadership in general, and he’s clearly staying the course on this blue-chip stock.

Another example is Costco, a firm that really took off as people looked at different ethical ways to sell groceries. Although Buffett recently took profit of $1.3 billion leaving the stake in Costco (COST), it was reportedly his favorite company for a while.

Buffett Chooses Asset-Rich Companies

A common theme among Buffett’s favorite ways to invest is his selection of asset-rich companies. For example, Berkshire purchased a railroad based on the investment thesis that few if any additional railroads will be built again in the US and the cost to do so is prohibitively high.

Buffett doesn’t like to dabble with companies that are unproven. And he generally steers clear of new equities that are more based on an idea and hope than anything tangible.

Apple is a good example of what he prefers to stick with. These company has an insurmountable “moat” – a sustainable competitive advantage that’s hard for other companies to penetrate or neutralize.

Just imagine what’s necessary for a competitor to dislodge Apple now. A better phone needs to be built, marketed and sold globally and every app on your phone would have to be incorporated into a new ecosystem. The costs are in the trillions and even then it might be difficult for consumers to trust a new, unproven brand.

In addition, Buffett is cash-conscious. He reportedly keeps at least 15% of Berkshire’s market cap in cash reserves at all times, rather than trading on margins or trying to optimize leveraged money at the expense of that same keyword – stability.

He Invests In What He Knows

Buffett has had a lot of negative things to say about cryptocurrency, as many investors head for these brand-new digital assets or some other type of similar play. He also scorns the SPAC or ‘special purpose acquisition company,’ also called a ‘blank check firm,’ that exists only to take another company public.

“More people are entering the casino than are leaving every day,” Warren said in a recent interview, speaking broadly about many kinds of wild ‘tulip mania’ that overcome today’s investor class, from hyper-trading to the SPAC. “It creates its own reality for a while, and nobody tells you when the clock’s gonna strike 12, and it all turns to pumpkins and mice.”

Instead of playing musical chairs in this way, Buffett looks for value stocks – time-tested winners that may grow more slowly, but deliver steady, stable returns. (see more of our reporting on Buffett’s comments to shareholders here.)

For those interested in getting inside of his head, this is a little about Warren Buffett’s favorite way to invest that illuminates many of the principles that this old-school investor talks about emphatically when he looks back at his successful track record in the markets.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.