Should You Invest Like Warren Buffett?

Asking whether you should invest like Warren Buffett is like asking a dog if it should walk on fours. It’s already a given! A look at Buffett’s present net worth should convince you that his strategy is one worth emulating.

At 11, Buffett took the first step in his investment path by buying three shares of Cities Service, a natural gas company, for USD38 per share. He was then able to grow his portfolio and, along with it, his net worth which is at USD100 billion as of March 2021.

Now, the Oracle of Omaha (as he’s known) has large investments in several huge and well-known companies, such as Amazon, American Express, Apple, Bank of America, Coca Cola, Dairy Queen, IBM, Kraft Heinz, and Wells Fargo, among others.

It’s also not a secret that Buffett owns Berkshire Hathaway, a company with a market capitalisation of USD630 billion as at June 2021.

We could, therefore, conclude that Buffett’s way works. Otherwise, his net worth and portfolio as a value investor would be nothing to gush about.

So, what is his strategy and how can you invest like Buffett?

Buffett’s investing method

Buffett uses a method called value investing to accumulate his wealth. It could sound intimidating at first, but value investing is actually easy to understand.

Let’s break the phrase down. First, it is about investing, meaning it’s a way for you to make profits. Second, it focuses on the value of a stock, meaning it doesn’t care much about daily market activity but about a stock’s potential to generate revenue in the future.

In other words, Buffett’s strategy is unlike a trader’s. He doesn’t guard the market. Why not, you ask? It's because the market does not always reflect the true value of stocks.

A stock can be sold at a higher share price (for example, USD80) than its real value (say, USD71). It can also be sold at a lower price (for example, USD35) than its intrinsic valuation (say, USD43).

What value investors do is assess a stock’s real value is vis-à-vis the price it’s currently sold. If they chance upon a stock with a high intrinsic value but a low share price, they purchase this stock.

Of course, there are risks with value investing as with other investment strategies. However, fret not because there are ways for you to become a successful value investor like Buffett.

1. Look away from the market

We can’t emphasise this enough: The market doesn’t always accurately reflect a stock’s true value. Focusing on the market’s daily movement will not only compromise your time at work, with your family, and for yourself, but it will also throw you down into the abyss of anxiety.

Buffett himself does not follow popular market trends. He couldn’t care less about new IPOs (Initial Public Offerings) or new trendsetters. In fact, he publicly showed disinterest in what seems to be today's most popular investment option -- cryptocurrencies.

What Buffett does and what you can do to not be swayed by the bandwagon is to invest within your “circle of competence.” This means investing in what you know.

For example, if you are competent in transportation models, you should consider looking at companies in this industry. If you have experience in F&B, check if the top-performing restaurant chains you’re familiar with are listed.

And always, remember to stay committed to the companies you invest in. Think of value investing as a marriage: You marry someone in hopes of being with them for years to come and because you believe they will add value to your life in the long run. Before marrying them, you evaluate if they’re really who you want to spend the rest of your life with. You just don’t point at any stranger and propose marriage, do you?

2. Acquire knowledge

Value investing is not a sprint but a marathon. You can’t expect to know a stock’s valuation overnight and by copying what other investors are buying or selling. If you’re serious about value investing, you ought to start building knowledge.

What knowledge should you have? First, you need to know how to determine a stock’s valuation. Second, you need to learn how to pick companies with a high valuation.

Fortunately, opportunities to learn value investing abound in Singapore. The excuse “I got no time” is no longer acceptable as our movements are currently restricted by the pandemic. For instance, attending a two-hour online class won’t take up much of your day, would it?

Join our free investing masterclasses

Value investing is not a blind guessing game where you desperately pray that the stocks you bought gain value overnight. It doesn’t even require you to monitor your portfolio day in and day out. It’s becoming confident in the stocks you’ve picked and re-evaluating them bi-annually or annually.

But how do you become confident in picking stocks?

Buffett has this to tell everyone who wants to do value investing: read, read, and read. Buffett himself spends about five to six hours a day reading.

Knowing the business model of companies as well as the current and projected landscape of every industry will help you discover great investments and build a growing portfolio.

You may also consider reading blogs of successful investors in your local community.

3. Get a grip on your emotions

Beginning investors often get too excited to make money from the stock market that they tend to be overwhelmed with emotions. Fear, greed, and envy are what value investors don’t want to encounter as having any of these three usually leads to irrational decisions.

Several studies have shown that women are more successful investors than men because of one simple reason: women don’t let their emotions pressure them into making investment decisions. Women, studies say, are calmer and exercise logical thinking before buying or selling.

Men, on the other hand, tend to be greedy once they hear of a friend or a relative making money from a specific stock. At times, they even borrow more money to invest without thoroughly evaluating if the returns would really be consistent for the long term.

Most investors also panic whenever a stock price drops or soars. This fear usually drives them to immediately take action without first weighing what the price change means or whether it’s just a one-time event.

We also often fall victim to envy. When we see others publicising their gains on social media, we immediately buy the stock without properly examining whether it’s a good buy or whether the share price is consistent with its intrinsic value.

Emotions don’t have any place in a value investor’s success. To blindly follow what others are saying isn’t similar to making informed decisions. Follow only when you have done your calculations and you have conviction about the stock’s potential.

After all, going against the bandwagon feels good from time to time. You’re odd, yes, but you stand out.

So, take the road less travelled. Take the same path as Buffett’s.