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This article reveals 9 ways to invest like Warren Buffett, beat the market, and become wealthy.
In my path to wealth (I’m still journeying), Warren Buffett has influenced my understanding of investing.
Start Early
Starting as early as possible in your investment journey is critical. When you look back on Warren Buffett’s investment timeline, it’s striking how much money he was able to amass at a young age. He bought his first stock at 11. In fact, he had around $5000 to his name by 14.
If you look at the various net worth graphs of Warren Buffett’s fortunes, it’s staggering how much time has compounded his investments. Time is often a significant factor for the ultra-wealthy: 40% of the world’s billionaires are over 70.
Compound growth is easily one of the most important elements in investment, so it’s no surprise that starting early is one of the key components to growth.
Think of Stocks as Businesses
Stocks are not merely ticker symbols, they are an interest in a physical business. When you are making a trade and buying and selling stocks, it seems like an activity disconnected from everything. Everything about it seems impersonal and abstract.
Warren Buffett reminds us that when you buy a stock, you buy a portion of a business. If you were to drive past a farm, and a farmer was looking to sell a portion of his business to you, you would probably want to know a great deal about that business when you buy it.
You would want to know whether the farm is profitable, what assets the farmer owns, how risky is the farming business, how competent is the farmer, what threatens the business, etc. You would probably have endless questions, and it probably would be difficult for you to part with your money without considering it in great detail. Yet, every day, people buy businesses on the stock market without careful consideration. I once went out with a girl who bought businesses with company names that she liked.
The stock market in its ease of transaction, is both a blessing and a curse. We can buy access to a business’s cash flow, yet this ease of transaction is psychologically problematic. It makes it so easy for us to pull the trigger on an investment.
Buffett reminds us that a stock is linked to the future cashflows of a business and that we need to consider many factors. These many factors can lead us to understand the price. Until the point that we are confident that we understand the business, price is irrelevant.
Buy Moat Businesses
Moat businesses are businesses that have an enduring competitive advantage. They set the prices in their market and can operate profitably in difficult economic times.
Buffett, when describing businesses like Coca-Cola and Apple uses the word moat. There are many different types of moats.
For instance, a railway business will have an infrastructure moat as it is almost impossible for a new company to build a rail network. There are just too many barriers to entry. Often it takes a lot of push from the government to get through a rail project and even then, the costs are incredibly high.
Moats, however, exist in many forms. For instance, if you were to take Buffett’s famous Coca-Cola investment, it might seem like there are plenty of companies similar to Coca-Cola, but when you order a drink in a restaurant, do you order a Pepsi first? I don’t know about you but I always say co*ke, and they ask me if Pepsi is okay. This discourse shows how iconic the brand is.
Why is a moat so important? Pricing power. Buffett has famously stated:
“…basically, the single-most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”
I believe this to be one of Buffett’s most important quotes in identifying a strong business. If you were to look at any business in your portfolio, which businesses could easily raise their prices and increase their underlying profit and cash flow? This is the reason why I think Berkshire identified Apple as an unrivalled investment; customers who use Apple products are unlikely to switch as an ecosystem of products has been built around their products and services.
Apple is a business which can raise prices for its consumers relatively easily and can place demands on App developers in the Apple store, repair shops etc, as it holds such a dominant market position amongst hardware manufacturers.
Be Contrarian
By its very nature, investing is a contrarian discipline that suits those who do not follow the crowd. During bullish times, investments in hyped-up companies will usually suit the herd. However, running with a herd will lead to painful losses in market falls.
Another one of Buffet’s most famous investment quotes is:
“Be fearful when others are greedy, be greedy when others are fearful”
One of the most challenging aspects of investing is the psychological discord. Our instinct is to run with the crowd, but the best investors buy heavily when the market is down. If a good company is on sale in the market, then Buffett and other great investors, are keen to deploy their cash.
Both Munger and Buffett have talked about the importance of waiting for opportunities
“The Big Money Is Not In the Buying and Selling, But In the Waiting.”
Whilst everyone else is eager to get into the market in a bull run or get out in a bear market, Buffett and Munger would take the approach of going big on investments where there are undervalued companies, and avoid investments with hype behind them. Buffett even closed his partnership in 1969 because he could not find any investments. Between 2007 and 2009, during the Great Recession, Buffett bought heavily into Kraft Heinz, NRG Energy and Becton Dickinson and Co.
I followed Buffett’s example during the pandemic by investing heavily during the market downturn.
Continuous Learning
Buffett has always emphasised how much time he spends reading and learning new things. Munger described him as “a learning machine”.
As business changes and shifts, the investor needs to develop. You can see the change in Buffett’s investments over time. Although there are some businesses which appear to be evergreen such as co*ke Cola, there are others that are dead trees that need to be cut loose. For instance, Buffett bought Dexter Shoe Company which was eventually out-competed by companies in the emerging markets.
Since this time, I think Buffett has selected higher-quality companies in his portfolio. Buffett has also stressed the importance of learning from his mistakes, but that mistakes of omission tend to stick in his mind more. For instance, both he and Charlie Munger knew that Google had a competitive advantage, as they used Google Ads in their insurance business, but did not buy the stock.
Take a Long-Term View
Investment is an art where your thesis can take many years to play out. Buffett stresses that you should buy a stock with the mentality that the price the stock moves to in the short term does not matter.
He has famously stated:
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. You only have to do a very few things right in your life so long as you don’t do too many things wrong.”
This philosophy of making decisions that hold out in the long term is something that I take to heart in my everyday life. This wisdom seems to hold across our life choices. I find that the decisions I make that take into account long time horizons and that are not related to instant gratification tend to be the most successful.
Embrace Rationality
Although not quite as direct as Munger, Buffett is as rational as any top investor. His control of his emotions is a necessary component of his success.
I love this quote from Warren Buffett as he acknowledges the importance of emotions, but highlights how dangerous overly emotional thinking can be in in business and investment:
“I can’t recall any time in the history of Berkshire that we made an emotional decision,” Buffett stated. “You don’t want to be a no-emotion person in all of your life, but you definitely want to be a no-emotion person when making an investment or business decision.”
Anecdotally, in my business journey, I have made some emotional decisions by choosing to be lenient on clients based on their circ*mstances, but have almost always regretted it. Similarly, in investment, I have sometimes found myself led by the crowd in my early years. These investments have not worked out well for me.
Buy at a Margin of Safety
Once you determine the value of a business, you should buy below that price. This approach will provide you with a margin of safety.
For instance, if you calculate that a stock’s intrinsic value is £12, and the current price is £9 then you’re margin of safety is £12 – £9 = £3. Naturally, this means that you can both benefit from less risk for capital loss in your investment, and higher growth rates in your investment, should it be successful.
Buying at a margin of safety is also important because it protects the investor a little in the instance that he or she has made the wrong decision. At least if you buy a stock at a lower price, the fact that you have miscalculated the stock’s intrinsic value will be less costly in the long run. You may even make a profit from a poor investment.
Ignore the Noise of the Market
How does Buffett avoid the hype stocks and market fear and irrationality? Buffett’s Berkshire Hathaway is located far from New York in Omaha, Nebraska. I imagine that this is one of the secrets to Buffett’s success.
He not only keeps his costs down considerably with a fairly lean operation but also avoids the frenzy of the market.
“It’s very easy to think clearly here. You’re undisturbed by irrelevant factors and the noise generally of business investments,” Buffett said. “If you can’t think clearly in Omaha, you’re not going to think clearly anyplace.”
I have found that in the craziness of a big city, it becomes easy to be caught up in the madness. By not focusing too much on what is happening in the papers and on television it is easier to think rationally.
Conclusion
In conclusion, adopting Warren Buffett’s investment principles can pave the way for success in the financial markets and contribute to long-term wealth accumulation. Starting early, viewing stocks as ownership in businesses, and seeking companies with enduring competitive advantages are foundational aspects of Buffett’s approach.
Additionally, being contrarian, continuously learning, and embracing rationality are crucial for navigating market fluctuations and making informed decisions. Maintaining a long-term perspective, buying at a margin of safety, and ignoring market noise further, solidify Buffett’s timeless wisdom.
By incorporating these nine principles into your investment strategy, you can follow in Buffett’s footsteps, beat the market, and chart a course towards financial prosperity.
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