The Truth about Investing Like Warren Buffett

It’s quite amusing how the market has decided to embrace Warren Buffett, the CEO and chairman of Berkshire Hathaway.

When you look at it on the one hand, he’s looked upon by traders as well as active investors as somebody – the average person – that can actually beat the market. But on the other hand, Buffett most likely dislikes anything even resembling the approach of the average investor.

Unlike the way the average investor is typically treated in an online brokerage firm advertisement – meaning the guy is sitting in the luxurious office chair in his home, doing nothing during the middle of the day – while effortlessly trading in and out of stock positions. Warren Buffett does not actively sell his stocks like this. He buys positions and holds on to them for many years, if not forever.

“In selecting common stocks, we devote our attention to attractive purchases, not the possibility of attractive sales,” wrote Buffett in his 1985 letter to shareholders. This is an important piece of Buffett’s investing philosophy even though it’s stated subtly.

The virtues of purchasing a small amount of stocks and holding onto them for what seems like forever should be evidence enough by looking at Berkshire Hathaway’s public securities portfolio.

His 3 biggest holdings began more than 2 decades ago. He purchased Coca-Cola in 1998. He bought shares in Wells Fargo in 1999. He purchased shares of American Express for the first time in 1991. All told, these 3 positions are worth $37.8 billion on the balance sheet of Berkshire Hathaway.

Let’s not forget about the fact that all of these companies provide a considerable portion of their earnings each year to dividends, which Buffett then turns around and uses for other investment ideas. During the year, Coca-Cola will spend nearly 2/3 of its net income by paying it out to shareholders like Berkshire Hathaway.

The point of this is to say that Buffett should be used as an example for investors. There’s no question about that. But the example has to be clear. Buffett does not actively trade in and out of stocks, and neither should you if you’re going to follow his advice. Instead, you need to find excellent companies, accumulate positions in these wide moat businesses over time and at a discount, and then allow the shares to mature over the years, and maybe even wait decades.

“Lethargy bordering on sloth remains the cornerstone of our investment style,” wrote Buffett in 1990. Always do yourself a favor and remember that this is what Buffett stands for, not what the financial media tends to insinuate.

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