Warren Buffett is as transparent as they come. He has never been bashful about discussing his investing approach in detail. The multibillionaire doesn't mind talking about his failures as well as his successes.
In Buffett's latest letter to Berkshire Hathaway (BRK.A 1.57%) (BRK.B 1.42%) shareholders, he even revealed what he called his "secret sauce." It's a straightforward approach that's worked exceptionally well for him.
It can work for you, too. Here's how to make money following Buffett's "secret sauce" strategy.
Image source: The Motley Fool.
A peek behind the curtain
Buffett included a section in his recent letter to Berkshire shareholders titled "The Secret Sauce." He introduced this section by stating that he would "take a peek behind the curtain" of how Berkshire had achieved tremendous success through the years.
The legendary investor spent several paragraphs giving specific examples explaining how the "secret sauce" strategy worked. But then he summed things up with three sentences that captured the essence of his approach:
The lesson for investors: The weeds wither away in significance as the flowers bloom.
Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.
Buffett's secret to making so much money for Berkshire (and himself) is to invest in multiple businesses, knowing that they won't always perform as well as hoped. Over the long term, though, some of them will become huge winners. These are the blooming flowers Buffett mentioned.
The other, less successful stocks will become such a small percentage of the total portfolio that they'll be insignificant. They're the weeds that wither away.
Arguably, the most important part of Buffett's approach is time. That's why he stated that starting early and having a long life span helps.
My own personal examples
Buffett's "secret sauce" strategy really isn't a secret, of course. He simply follows the maxims of buy-and-hold investing. It has indisputably worked for him: After all, Buffett's net worth stands at nearly $109 billion.
I have no doubt whatsoever that this approach will work for other investors as well. I'm so confident, mainly because it's worked for me.
To be sure, my investing success pales in comparison with Buffett's. Along the way, I've dabbled in many different strategies. But it's been the same buy-and-hold approach articulated so well by Buffett that's worked the best for me. I'll provide a few examples that illustrate exactly how.
Apple (AAPL 0.50%) ranks as my single biggest holding today. That's something that Buffett and I share in common -- it's the largest position in Berkshire Hathaway's portfolio as well. However, I initiated a position in Apple a long time before Buffett did.
When I first bought shares of Apple, its size was roughly in line with other stocks I owned. As it gained value (thank you, iPhone), the stock grew to tower above all the others. Apple was a flower that bloomed.
A few years ago, I invested in another business that I thought had a lot of potential. Skillz (SKLZ 7.73%) operated a platform that attracted 10 million gamers. It had recently landed a deal with the NFL to develop a mobile game. Things seemed to be looking up.
Not long after I bought shares of Skillz, though, the stock began to steadily decline. I held on, thinking that the situation would improve. It didn't. I've lost most of my initial investment.
However, it's a tiny part of my overall portfolio. The gains generated by Apple and other winners have more than offset the loss from Skillz. Just as Buffett wrote, Skillz became a weed that withered away in significance.
Make money Buffett-style
Of course, you do have to at least select a few good stocks that go on to deliver spectacular returns for Buffett's approach to work well. He has some advice on that selection process, too: Pick wonderful businesses at a fair price.
You might not become a billionaire like Buffett. However, buying and holding a portfolio of stocks over the long term has been proven to work. You truly can make money following Buffett's "secret sauce" strategy.
