Another Way to Follow Buffett

Warren Buffett recently announced to the world that he's buying American stocks, and he encouraged others to do so, as well. He reiterated his famous advice: "Be fearful when others are greedy, and be greedy when others are fearful."

It makes sense, no? When people are afraid and are selling, stocks often fall to attractive levels. Those selling often do so at a loss, due to the market's having plunged. Meanwhile, those brave enough to be greedy in such an environment can pick up lots of bargains, and can profit in the long run. It sounds so reasonable ... yet it can be so hard to do!

Here's the temptation -- check out how some well-regarded companies' stocks have fared over the past year:

Company

1-Year Return

Cadbury PLC (NYSE: CBY  )

(27%)

General Electric (NYSE: GE  )

(46%)

Western Union (NYSE: WU  )

(29%)

Weight Watchers (NYSE: WTW  )

(40%)

Linear Technology (Nasdaq: LLTC  )

(25%)

International Game Technology (NYSE: IGT  )

(67%)

Boeing (NYSE: BA  )

(44%)

Data: Yahoo! Finance.

I'm sure that many stocks on your watch list are showing similar declines.

The problem
Of course, you may not be rushing out to buy them, despite Buffett's encouragement. You might just be ... scared. That's reasonable. After all, even Buffett added, "Let me be clear on one point: I can't predict the short-term movements of the stock market." You might buy some stocks today only to see them fall further. Think of International Game Technology, down more than two-thirds. Some probably thought they were safe buying it when it was down only 30%-40%. But then it just kept falling.

Meanwhile, if you don't buy now, you might lose out. As Buffett noted, "What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."

The solution
Fortunately, there's a solution: Buy in chunks. If you're not comfortable putting the $6,000 you have available in this stock or that, consider investing just $2,000 of it now, and $2,000 in a month or so, and $2,000 a little later. If the market rises, at least you will have bought some stock. If it falls, you won't have bought everything at a high price.

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And one more thing ...
By the way, if you start buying, remember to not go too crazy. You don't want to end up with too many different holdings. That sets you up for trouble -- you won't be able to keep up with all of them, for one thing. And if one skyrockets, but it's just a tiny portion of your portfolio, it won't have the kind of effect you'll be wishing it had.

Let's revisit our friend Mr. Buffett, because he explains this point very well. In his 1993 letter to shareholders, for example, he noted, "I cannot understand why an investor ... elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choices -- the businesses he understands best and that present the least risk, along with the greatest profit potential." Think about this and how sensible it is. If you have 10 top ideas and you invest in 10 other companies, as well, why is that money in those 10 other firms, instead of in the places you have the most faith in? If you're confident of your choices, concentrate your money a little. (You should still aim to diversify into at least six to 15 different companies.)

Buffett also quoted Mae West, and her wisdom can apply to many facets of our lives: "Too much of a good thing can be wonderful."

Longtime Fool contributor Selena Maranjian owns shares of General Electric and Linear Technology. Western Union is a Motley Fool Inside Value recommendation. Linear Technology is a Motley Fool Stock Advisor selection. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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  • Report this Comment On November 06, 2008, at 9:37 AM, Invest2or wrote:

    Buffett's "magic" is pretty straight forward. Pick the best and stick with them, as long as the fundamentals hold up. He has a great advantage over us normal investors, in that he can demand such things as special preferred shares and set his annual return via negotiation.

    My BRKB shares will probably be the last in my portfilio to be sold. Many years from now.

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