What It Really Means to Invest Like Warren Buffett

In selecting common stocks, we devote our attention to attractive purchases, not to the possibility of attractive sales.

- Warren Buffett (1985)

There is something supremely ironic about the market's embrace of Warren Buffett, the chairman and CEO of Berkshire Hathaway.

On the one hand, he's touted by traders and active investors as evidence that the average person can (or, at least, should try to) beat the market. On the other hand, it's probably safe to assume that he abhors anything which even closely resembles their approach.

Unlike the typical portrayal of an investor in an advertisement for an online brokerage (you know the one, with a guy sitting in an overly luxurious home office -- in the middle of the day, no less -- effortlessly trading in and out of stocks), Buffett does not actively sell stocks. He buys and then holds onto them for as long as possible.

"In selecting common stocks, we devote our attention to attractive purchases, not to the possibility of attractive sales," he wrote in his 1985 letter to shareholders. That this is subtle shouldn't be interpreted to mean it's unimportant.

The virtues of buying a select few stocks and then holding them for years if not decades is evident in Berkshire's portfolio of public securities.

Its three biggest holdings were initiated more than two decades ago -- Coca-Cola in 1988, Wells Fargo in 1989, and American Express in 1991 (the initial stake was in American Express' preferred stock). Together, these three add an astounding $37.8 billion to Berkshire's balance sheet above and beyond its cost basis.

This is excluding the fact, moreover, that all of these companies distribute a considerable portion of their earnings each year in dividends, which Buffett then recycles into additional investment ideas. For its part, Coca-Cola pays out nearly two-thirds of its net income each year to shareholders like Berkshire.

The point here is that Buffett should be used as an example for investors. But that example is not to actively trade in and out of stocks. It is rather to identify great companies, accumulate concentrated positions in them, and then allow the fruits of your work to mature in the years if not decades ahead.

"Lethargy bordering on sloth remains the cornerstone of our investment style," Buffett wrote in 1990. I encourage you to always remember that this is what the Oracle of Omaha stands for, and not what's often insinuated in the mainstream financial media.

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  • Report this Comment On August 10, 2014, at 5:34 PM, erich69 wrote:

    I can appreciate that you are an admirer of Buffett like myself. I have read as much about him as possible as my passion for investing grew. What many fail to grasp though is that he is a hardcore capitalist appearing like a simpleton value investor. Although I didn't write this article, it is spot on, check it out to get a better understanding of what Buffett has really done:

    http://www.businessinsider.com/myth-you-too-can-become-warre...

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