Warren Buffett's unique and evidently successful investing style is an odd thing to discuss. It's relatively simple to describe but almost impossible to replicate completely.
After all, although Buffett is famously generous with his investing wisdom, there'd be far more billionaires in the world if this wisdom was easy to implement.
But although achieving a Buffett-like return of over 20% per annum is beyond the reach of most of us mere mortals, I still believe that understanding the Warren Buffett style can benefit our own investment practice.
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The Warren Buffett investing style
I think Warren Buffett's investing style can be summed up in four steps:
- Find a high-quality, financially sound and dominant company that you understand completely.
- Assess whether a company possesses a wide economic moat, an enduring competitive advantage that it can use to keep competition at bay.
- Analyse its management, whether it is run by intelligent, honest and competent people.
- Buy it at a price that is at (or preferably below) its true valuation, and preferably never sell.
I told you it appears simple. In my view, you can extrapolate these steps to explain almost every move Buffett has ever made at his company Berkshire Hathaway.
It could be buying Apple in 2016, Coca-Cola in the 1980s, or American Express in the 1960s. Or else selling airline stocks at the start of the COVID pandemic. Even Buffett's famous reluctance to invest in tech shares (see step one).
But enough from me. Here's how Buffett himself has told us how to invest over the years:
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards — so when you see one that qualifies, you should buy a meaningful amount of stock.
The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle.
Our trust is in people rather than process. A 'hire well, manage little' code suits both them and me.
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.
How to invest in 2024
As discussed earlier, these Buffett steps might seem simple. But until you are banging out high double-digit returns for years on end, you can't claim to have mastered them.
So how should Buffett-aspiring investors approach the share market in 2024? Well, I try (to varying degrees of success) to incorporate Buffett's investing style in my own portfolio, and I'll be continuing to do so in 2024.
Some of my favourite investments possess (at least in my view) dominance and financial strength while having business models I can get my head around. They also display strong indications of possessing one of Buffett's famous moats.
Some examples include Washington H. Soul Pattinson and Co Ltd (ASX: SOL), Telstra Group Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES). I also have some international shares in my portfolio, which I also have a similar level of confidence in. These include Apple, Alphabet, Procter & Gamble, Adobe and Netflix.
In my view, all of these names have quality management teams, and I was able to buy them at prices that made sense to me.
This is the approach I'm going to continue to use in 2024, and one that I would recommend to any investor that is interested in following the Warren Buffett style.
If your name is not Warren Buffett, chances are you'll be imperfect in this endeavour. But staying the course will help make you a better investor over the long run.
