Do you want to think like Warren Buffett? Yes, inquiring minds want to know! But the real question is: Do I REALLY want to think like Warren Buffett?
In terms of value investing and having what it takes to become a billionaire like him, maybe it would be painful to live inside Warren Buffett’s mind. For one, even though he’s one of the richest people in the world, he is one of the most frugal people in the world as well.
Do You Really Want to Think Like Warren Buffett?
We don’t see Warren Buffett sunbathing on a million dollar yacht. And he’s lived in the same old house since 1958, pretty much has driven the same station wagon, gone to the same McDonald’s for his Egg McMuffin Sausage Biscuits, and has driven the 10 minutes to the same office. In other words, he is extremely rich because he’s been extremely frugal. A typical American would want to live a little with so much money, at the very least.
To Really Think Like Warren Buffett
Warren Buffett is a person many investors look to as a role model. His “value investing” style is well known, and his frugal lifestyle is an extreme contrast to his wealth.
Over time, I think my trading style has leaned toward a more “value investing” approach. But I still follow the stock market daily and study the charts and technical analysis.
If I have invested in great companies, which I think I have, then I should just sit on these stocks for years and years and watch them grow.
The growth potential of each company should smooth out the daily and monthly fluctuations of a stock’s price over the years.
Some Key Points
Much of the information in the article was gleaned from The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy
by Robert G. Hagstrom.
Investing in a Business, Not a Stock
To think like Warren Buffett, it’s important to focus on the actual company itself, and how it will do in the long run. I’ve been going back and forth between investing long-term, and holding stocks short-term to take advantage of trends to turn a profit.
Investing in a company forces one to research and study the entire company and its potential to grow over the years, and one will put more thought into buying and selling a stock with these goals in mind.
Increasing the Size of Your Investments
I’ve been very cautious and safe with the size of my positions. I suppose the practical approach would be to diversify and not put all your eggs in one basket. But, Warren Buffett’s investment philosophy is to make sizable investments and diversify less. The logic being that if you’ve done all your homework then you know a company is a great company that’s under-valued, and you have more certainty the stock price will rise.
I’ve started applying this by increasing my size of positions in Apple, Inc. It’s sort of my testing ground for this style of investing, and Apple is still probably the most valuable company in the world. Its products and the Apple brand are ubiquitous throughout the world.
Warren Buffett doesn’t emphasize over-diversification of a stock portfolio. Just as Warren Buffett doesn’t believe in Mutual Funds because those investments are huge pools of dozens, sometimes hundreds of stocks. Earnings potential is minimized at the price of over-diversification. Better to do the research and pick the winning stocks based on sound research of a company’s fundamentals, financials and earnings.
Reducing Your Portfolio’s Turnover Ratio
I am definitely guilty of this one.
I’m guilty of holding stocks for months and reaping the profits from a good uptrend. The thing is, buying and selling stocks in less than a year’s time will also cost more with short-term capital gains taxes. Plus getting into the habit of turning over stocks more frequently causes the commission fees to add up.
Intrinsic Value vs Market Predictions
The stock market can fluctuate greatly from day to day, week to week. The value investing style is to invest in stocks that are under-valued, and in those companies that have great growth potential. Market Predictions are just that, predictions and although there might be rational logic behind those predictions, they shouldn’t outweigh the intrinsic value of the company itself.
Again, it all boils down to investing in the company and not the stock itself.
While most active traders will study the day to day fluctuations of a stock, and do all the daily research in trying to do intraday trading and swing trading, Warren Buffett is known to only check his portfolio once every couple of weeks. And he was quoted as saying that an investor should buy stocks and not look at them for the next 5 years.
It’s like putting money away on vacation and forget about them.
If you’ve done your homework, then the rewards will be much greater in the long run.