The Tao of Buffett

Over the years, Buffett has become a sort of hero to the investment community, with his mix of forthrightness and folksy wisdom.

His annual shareholder meeting, dubbed the Woodstock of Capitalists, draws investors from all over the globe – keen on getting advice from the main man himself.

And can you blame them? The man is worth well over $60 billion, a truly astonishing figure. He’s presided over the growth of Berkshire Hathaway into an absolute giant.

Buffett has been at the head of Berkshire for 50 years and in that time he’s developed a brand of his own: he’s got his own Tao of investing. Here are some of the central tenets.

Stick with what you know

Sure, the Oracle of Omaha is considered one of the greatest investors in the world, but there are areas where even he won’t go. He suggests that investors stick to buying what they know and the man follows his own advice. Buffett has often said he will not invest in high-tech. Ever. He doesn’t understand it and his portfolio reflects that fact.

Buffett’s top stock holdings are American Express, Coca-Cola, Wells Fargo and IBM. He stays away from biotech or internet companies like Facebook or LinkedIn.

It makes sense. Why would you put money into a company selling something you don’t understand or perhaps – don’t even use? Sticking to your “circle of competence”, as Buffett puts it, enables you to focus on the things you DO know and leverage your personal expertise. When you leave your circle of competence, you better be prepared to conduct massive research or realize that you are merely speculating.

buffett

It can seem kind of…boring. Or else you may be thinking, “Errr…there’s not much that I really know.”

Real talk: You know more than you think.

Peter Lynch, another investing great, was also a proponent of investing in what you know. He’s said time and time again that his best ideas came from his family. Namely, he would see what products and brands his kids or his wife would be using and raving about. He’d invest in that. It’s hard to go wrong when people consistently love a product a company produces. Hmm…kind of sounds a bit like Apple computer.

Don’t Listen to Others

Buffett advises you to not listen to anyone.

Except for Warren Buffett. Probably listen to Warren Buffett.

There are so many ways to invest in the market. There’s active trading, passive investing, high frequency trading, and the list goes on and on. Everyone has an opinion on what the “right” way to invest, and everybody claims their way is the best. There are others who will talk about timing the market, laying out the reasons why NOW is the right time to buy. Anyone who thinks they can predict the short-term movements of the stock market is either wrong or lucky.

As Buffett says, “market forecasters will fill your ear but will never fill your wallet”. That’s the problem isn’t it? All those people who have an opinion aren’t going to make you any money. No, that’s your responsibility. Base your decisions on actual research rather than the cajoling and optimistic words of others.

Buffett doesn’t listen to any of it. He outlined his investment philosophy decades ago and he’s loyally stuck to it, buying fundamentally solid companies at a discount whenever possible…and holding them forever.

Understand What You’re Buying

Buffett invests in businesses that he understands. Ever since the man picked up a copy of Benjamin Graham’s The Intelligent Investor, Buffett has strived to invest in businesses that are undervalued.  He wants to buy really good businesses that he really understands, at a really good discount.

The majority of his stock holdings are in the financial and consumer goods companies. Geico, Wells Fargo, American Express mix well with other giants such as Coca-Cola and Walmart.

To understand a company well enough to invest in it, Buffett first needs to know what its competitive advantage is. This idea comes from Benjamin Graham, the idea that you should invest in businesses with a significant moat, or business advantage, that will allow it to outperform its competitors.

buffett

Both Geico and Walmart are companies that have huge moats in terms of both market share and being the dominant low-cost provider in their respective industries. Coca-Cola’s competitive advantage is its brand recognition. Everyone and their mom knows what it is.

Buffett also makes sure he has what he calls a margin of safety. As a value investor, Buffett seeks out companies that are worth more than the price at which they’re selling. If Buffett thinks Coca-Cola is worth $100 billion but the market is pricing it at $75 billion…the difference between the two is his margin of safety. If a stock is already available for sale at a discount, there is significantly less downside.

Some raised their eyebrows when Buffett invested half a billion dollars in PetroChina – a seemingly aging oil company with creaky, aching joints – but W.B suspected that it was severely undervalued in 2003 with a market cap of $37 billion. When he eventually sold the stock, it was valued at $275 billion.

Where will the Business be in 10 years?

Warren Buffett has often said you should only buy something if you’d be happy to hold it for 10 years. As in, if the market suddenly shut down you wouldn’t even bat an eyelid.

It’s clear that Buffett is a buy and hold investor and that he’s always looking far into the future when contemplating a purchase. After all…Buffett purchased American Express back in 1964. As he says, “our favorite holding period is forever”.

The company was embroiled in a scandal at the time, but Buffett saw the inherent value and snapped it up. Similarly, he bought Coca-Cola back in 1989. Now these are long-term investments!

When you adopt this approach you suddenly become very selective – and why not? It’s your money.

Diversify, diversify, diversify

Buffett has been quoted as saying “diversification is protection against ignorance”.

He prefers to make big bets on a few great companies.

However…that approach may not be the best for you. Buffett recognizes that. He admits that for the common man, the retail investor, it’s better to diversify and be invested in ETFs and index funds.

Even if you do all your homework, even if you cross all your t’s and dot all your i’s…you still can’t know EVERYTHING about a business. An investor who puts all their money in one company is inviting trouble. What if something goes wrong? Better to spread your money around enough to mitigate your risk.

The problem is when people stop doing their homework and rely on diversification alone to yield them good returns. That’s why Buffett is so negative on diversification.

millennials

To learn more about Warren Buffett’s personal style of investing, check out this course called “Investing Like the Greats“!

January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



One response to “The Tao of Buffett”