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How to Invest Like Warren Buffett

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Warren Buffett is one of the legends of stock investing.

We all know his story.

He started investing in stocks when he was just 11.  By the time he was 29 years old, he was already a millionaire stock investor.

In his 60s, he became a billionaire stock investor.

Often, the biggest question people ask about Buffett is: how does he do it?

And: could I do it too?

Buffett has become rich by buying undervalued, or out of favor stocks, and holding them for years.

Sounds easy, right?

If it was, everyone would be able to do what Buffett has done.

However, Buffett does have some secrets that us mere mortal investors can deploy to help us pick great value stocks.

3 Secrets to Picking Great Value Stocks Like Buffett

1) Buy What You Know

Even investing legends have favorite products. Over the years, Berkshire Hathaway has collected a big roster of well-known companies including Dairy Queen, See’s Candy, and Burlington Northern railroad.

How many of these acquisitions were influenced by Buffett’s own preferences for the products?

In Berkshire’s stock portfolio, one of its longest owned stock positions is in Coca-Cola, which Buffett first began buying in 1988.

Is it a coincidence that Coke is one of Warren Buffett’s favorite drinks? Over the last decade, Buffett has disclosed in interviews to both Fortune and the Financial Times that he drinks 5 cans of Coke a day, usually Diet Coke or Cherry Coke.

Clearly, he’s a fan.

But you have to do more than just liking a product, to buy the stock.

Buffett has always been an avid researcher and used to order the Annual Reports from companies, when they would send them to you in the mail, to check the financials. He used to have stacks of the reports piled in his garage.

What’s your favorite product or brand?

We often have our fingers on the pulse of everyday products and activities, or even of something that is used in our jobs, which might get overlooked by others.

It’s a great way to find value stocks.

2) Buy Stocks on Sale

This sounds so simple, right?

But not so fast.

Since the March 2020 coronavirus sell-off, stocks have been on a tear. In 2021, the S&P 500 hit 70 new all-time highs, second only to red-hot 1995, which had 77 highs.

Over the last 2 years, it has become more difficult, but not impossible, to find good quality companies that are “on sale.”

But Buffett still believes in buying undervalued, well-known companies with stellar earnings growth.

One of the most undervalued stocks he’s bought since the beginning of the pandemic was AbbVie, the pharmaceutical giant and maker of Botox.

It was one of his few new additions to the Berkshire portfolio in 2020 and he got it massively undervalued, with a forward P/E of around 8 and a dividend yielding over 4%.

Shares have since rallied to new all-time highs.

Buying stocks on sale is the easiest way to invest like Buffett. Any investor can search for value stocks by the classic fundamentals like P/E, PEG or Price-to-Sales ratios.

If you had done so in 2020, you would have seen some great value stocks, including AbbVie.

It doesn’t get any easier than that.

Continue . . .

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3) Learn to Pivot and Change Course

Remember when Berkshire Hathaway owned IBM?

Neither do I, but for 7 years, until 2018, Berkshire had a large position in the technology giant.

Originally bought in 2011, Berkshire spent $10.7 billion, buying at the average price of $170 per share, to take a significant stake in the company.

This was going to be Buffett’s big play into technology, an area he had famously avoided for decades.

But it never really worked out. In 2016, shares fell as low as $125.

Buffett decided to sell, and exit the position, notwithstanding one of his most famous pieces of advice, “our favorite holding period is forever.”

Buffett shrugged off the defeat in interviews saying the company never lived up to expectations so he was changing course.

What did he buy instead?

Apple.

In 2016, Apple was undervalued with a forward P/E of around 10 and the Street was mostly ignoring it.

That investment has more than made up for the mistake of buying IBM and is now one of the key pillars of Berkshire Hathaway’s business.

You will make investing mistakes, but the secret is to know when to pivot.

Buffett does it, and you can do it too.

Buffett’s Final Key Ingredient: Discipline

Buffett has one skill as an investor that’s hard to come by: discipline.

He will wait, sometimes years, in order to buy a stock, or a company, at a low price.

His discipline paid off in the 2008-2009 financial crisis when he was able to step in and offer financial assistance to struggling banks, offering a $5 billion bailout to Goldman Sachs, for instance, when others were on sinking ships.

He had what his mentor Benjamin Graham famously called a “margin of safety.”

This can be achieved by being prepared for pullbacks, corrections or even bear markets.

Buffett’s Discipline Pays Off in 2022 

Last year, in November 2021, the growth stocks began to weaken and the sell-off picked up steam in 2022. The NASDAQ fell 20% and the S&P 500 slid 10% year-to-date.

While many growth stocks were suddenly on sale, value stocks also sank. Although they were already cheap, you could get them even cheaper.

This was a buying opportunity. Buffett’s patience had paid off. In 2022, he jumped in to buy, taking a big position in oil producer Occidental Petroleum and he bought Alleghany, an insurance company, for $11.6 billion in cash. It was his biggest acquisition since 2016.

Buffett missed out on the deals during the 2020 coronavirus sell-off. But his buying spree 2 years later just goes to show you that even if you missed that buying opportunity, another one is always coming.

Did you have the discipline to wait for the best deals?

Were you ready for this year’s market sell-off?

How to Make Money on Buffett’s Success

When you combine these keys to successful investing, only one element is missing: time.

Buffett prefers to buy stocks he can own for the long haul. He’s quoted as saying “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

After finding the right stocks at the right prices, you have to give your stocks time to live up to their full long-term potential.

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Good investing, 

Tracy Ryniec

Tracey Ryniec, Zacks' insider and value strategist, is editor in charge of the Value Investor portfolio.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.



 

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