🔍
Warren Buffett's Investment Strategy, Explained With Buffett Quotes & Stocks - YouTube
Channel: The Motley Fool
[0]
Dylan Lewis: Warren Buffett is arguably the most
respected investor of all time, and for good reason.
[5]
In his 54-year tenure as CEO of Berkshire
Hathaway, Buffett has delivered annualized
[10]
returns of over 20% for investors as of mid-2019,
more than twice the pace of the S&P 500 over
[16]
the same period. And he's done it
without applying any extraordinarily complex methods.
[21]
In fact, Warren Buffett's
investment style is surprisingly simple.
[25]
In this FAQ video, we’re going to break
down how the “Oracle of Omaha” invests
[30]
by looking at his current and past holdings
and some of our all-time favorite Buffett quotes.
[39]
One of the most important things you need
to know about Warren Buffett is that he invests
[43]
for the long term.
[44]
Perhaps my favorite Buffett quote of all
time is, "You can't produce a baby in one month
[49]
by getting nine women pregnant."
In other words, some things just take time.
[53]
The first thing you need to do if you want to invest
like Warren Buffett is to stop chasing short-term gains.
[58]
Buffett doesn't judge is invest performance
by looking at how well his stocks did over
[61]
the past week, month, or even year.
Instead, he focuses on multi-year returns.
[67]
In fact, Buffett doesn't even buy stocks because
he thinks their share prices are going to go up.
[71]
He focuses on buying good
businesses that are well run.
[74]
This is certainly worked out in his favor,
as Berkshire Hathaway's investment returns
[78]
speak for themselves.
[80]
As Buffett says, "If you aren't willing to
own a stock for 10 years, don't even think
[84]
about owning it for 10 minutes."
[85]
While there are certainly exceptions,
Buffett approaches all investments as if he's going
[89]
to hold them forever. There's another
commonality with all his holdings.
[93]
If you look at Berkshire Hathaway's current
stock portfolio, especially Berkshire's largest holdings,
[97]
you might notice that
there isn't a ton of variety.
[100]
Specifically, among Berkshire's top 10 holdings,
you'll find no fewer than seven banks,
[105]
as well as two large
investments in food companies.
[107]
Apple is the only stock
not in those two categories.
[110]
Many observers might say that Berkshire's
portfolio lacks diversification, and that's true;
[115]
however, Buffett believes
that's not necessarily a bad thing.
[118]
In fact, you could say that the lack of diversification
is responsible for Buffett's best investment returns.
[124]
Simply put, Buffett feels it's better to have
an undiversified portfolio made up of businesses
[128]
he understands than to have a diversified
group of stocks he isn't well equipped to evaluate.
[133]
Buffett doesn't understand technology stocks
as well, so you don't find very many in his portfolio.
[139]
He refers to this concept as
"staying within a circle of competence."
[142]
As he says, "You only have to be able to evaluate
companies within your circle of competence.
[147]
The size of that circle is not very important.
Knowing its boundaries, however, is vital."
[151]
In other words, if you know banks well, as
Buffett does, there's absolutely nothing wrong
[155]
with owning a lot of bank stocks.
[157]
Having a deep knowledge of the space gives
Buffett a better sense of the actual value
[161]
of the businesses he's holding, and he's one
of the most notoriously value-oriented investors
[166]
in the business.
[167]
As Buffett likes to say, "Price is
what you pay, and value is what you get."
[171]
The basic concept
of value investing is simple.
[173]
By investing in stocks that are trading for
less than they're truly worth, you have an
[176]
inherent advantage as a long-term investor.
[179]
However, finding stocks that are trading at
a discount is easier said than done.
[183]
A full-scale discussion of value investing
is a little beyond the scope of the video,
[187]
but if you want to learn how to invest like
Buffett, the best place to turn are the teachings
[191]
of Ben Graham, Buffett's mentor.
[194]
Buffett himself has referred to Graham's book
The Intelligent Investor as the best book
[197]
on value investing ever written.
[199]
Now, you may be wondering, what characteristics
does Buffett actually look for in businesses?
[204]
It's difficult to overstate how much value
Buffett gives to outstanding management.
[208]
In his mind, a great shareholder-friendly
management team can make an otherwise so-so
[212]
stock pretty attractive.
[213]
Conversely, and otherwise excellent business with
a poor management team can be a losing investment.
[219]
Look for companies with a strong track record
of raising dividends and whose management team
[223]
has their interests aligned
with those shareholders.
[225]
For example, here at The Fool, we like to
see incentive-based compensation tied to long-term
[230]
performance goals as opposed
to a single quarter’s earnings.
[233]
Another concept that's important to Buffett's investing
style is identifying durable competitive advantages,
[239]
often called moats.
[240]
For example, Apple's loyal customer base gives
the company a big advantage going forward,
[245]
and is a big reason why the
stock is Berkshire's largest holding.
[248]
Coca-Cola has a massive distribution network
and one of the best-known brands in the world,
[253]
the combination of which gives it efficiency
advantages and pricing power over some of its peers.
[258]
While Buffett does tend to have long-term
relationships with the stocks he buys, he
[261]
also isn't totally wed to them.
[263]
Buffett once said, "All there is to investing
is picking good stocks at good times and staying
[268]
with them as long as
they remain good companies."
[271]
Pay particular attention to the latter part of
that quote -- "as long as they remain good companies."
[276]
While Buffett is certainly a buy-and-hold
investor, he sells stocks regularly and for
[280]
a variety of reasons.
[281]
If Buffett's original reasons for buying a
stock no longer apply, he won't hesitate to move on.
[286]
As an example, it might surprise you to learn
that Buffett built up a pretty large stake
[290]
in Freddie Mac in the 1990s.
[293]
By 1998, Berkshire owned nearly 9% of Freddie
Mac, a stake worth $3.9 billion at its peak,
[298]
and a massive 1,200% return for Berkshire.
[301]
However, in 2000, Buffett abruptly
sold nearly all of his position.
[306]
Why would he get rid of
such a successful investment?
[308]
Well, Buffett noticed that the management
team was becoming too focused on delivering
[312]
quarterly results, and they were starting to take
on more and more risk to achieve those goals.
[317]
As we all saw during the financial crisis,
these risks ended up being more than just
[320]
a small warning sign.
[322]
The lesson: don't be afraid to walk away from
an investment if you don't like what's going on,
[326]
regardless of whether
that stock is up or down.
[329]
Buffett said it best when he advised,
"The most important thing to do if you find yourself
[333]
in a hole is to stop digging."
[335]
Some of the best Buffett quotes really good
at the psychology of investing and maintaining
[339]
a level approach even
when things go haywire.
[342]
Many investors fear market crashes,
and it's not hard to see why.
[346]
Nobody enjoys watching the value of their
investments plunge, and high volatility can
[350]
certainly be scary.
[352]
But Buffett has frequently advised investors
that these are some of the best times to buy.
[357]
In his words,
"Opportunities come infrequently.
[359]
When it rains gold,
put out a bucket, not a thimble."
[362]
In fact, some of his most successful investments
have come during and shortly after market panics.
[368]
For example, Buffett's $5 billion investments
in Goldman Sachs and Bank of America in the
[372]
wake of the financial crisis
have turned out to be massive winners.
[376]
Having said that, market panics are only good
for long-term investors who are in a position
[380]
to take advantage.
[382]
This is one of the big reasons why Buffett
likes to have a decent amount of cash on the
[385]
sidelines at all times, and why Berkshire avoids debt.
As Buffett says, "Predicting rain doesn't count.
[391]
Building the ark does."
[393]
All of the Buffett wisdom that we're pulling
into this video comes from decades of experience
[397]
and thousands of pages
of reading on his part.
[400]
Buffett doesn't spend his workday sitting
in meetings or watching the financial news,
[403]
or really even analyzing stocks that much.
[406]
Instead, the activity that takes up
the most of his time is sitting and reading.
[409]
He regularly reads hundreds of pages a day
and has said, "That's how knowledge works.
[414]
It builds up like compound interest."
[416]
He believes that the more knowledge an
investor gains, the better position they'll be in to
[420]
make wise decisions
and avoid making mistakes.
[423]
To recap, you can simplify Buffett's
market-beating strategy down to a few core things:
[428]
• investing for the long term,
• buying good businesses that are easy to understand,
[433]
• looking for strong
management teams and
[435]
companies with durable competitive advantages,
• viewing market dips as opportunities,
[439]
• and learning; always learning.
[441]
If you want to do some more learning on Buffett,
this video is based on a fool.com article.
[445]
You can catch the link for
that down in the video description.
[449]
If you want some good entry-level investing content,
we've got a starter kit available at fool.com/start.
[454]
It walks you through all things investing,
from saving money to buying your first stock,
[458]
and it has a five-stock
sampler to get you started.
[460]
If you liked the video, let us know by
giving us a thumbs up and subscribing.
[464]
If you have a favorite Buffett quote, drop
it down in the comments section below.
Most Recent Videos:
You can go back to the homepage right here: Homepage