Warren Buffett has dazzled the investment community for years. He didn't become a billionaire overnight, but over time, he's built his own fortune and that of many others through his leadership of Berkshire Hathaway. As chairman, he's helped deliver a compounded annual gain of nearly 20% over 57 years -- that's compared to a 9.9% compounded increase for the S&P 500.
And that means it's no surprise investors far and wide look to Buffett for advice. Of course, most of us don't have billions of dollars to invest like Buffett, but here's the good news: We still can use some of the champion investor's techniques, and those techniques could lead us to investing success.
So if you want to follow in Buffett's footsteps this year and over time, do these three things.
1. Invest in what you understand
Warren Buffett never invests in a company he doesn't understand. Why? Because you have to understand a company's business in order to predict whether it may grow market share, dominate in its industry -- or fall flat when faced with competition. Understanding the business also helps you determine whether that company will need to invest heavily, and in what areas, in the coming years and whether that particular company has what it takes to fund growth.
This may sound like an easy rule to follow, but sometimes it isn't. A certain stock or other asset -- like a cryptocurrency -- may soar over a period of days or weeks. And, out of a fear of missing out, investors want to get in on the action. It's at these times we should remind ourselves of these words from Buffett and consider whether we truly understand the business (or industry) before buying.
It's OK to miss out. Buffett does -- for instance, he hasn't been heavily present in the area of technology, which has well outperformed the general market over the past decade. Still, by investing in what he knows best, Buffett has managed to grow his portfolio significantly over the long haul. And you could do the same.
2. Add dividend stocks to your portfolio
Dividend stocks generally won't deliver explosive growth in a short period of time, but they will offer you steady passive income year after year, which could add up to a big win over time. In 2022, Berkshire Hathaway's investment in Coca-Cola (KO +0.58%) brought in $704 million in dividend payments -- up from $75 million back in the mid-1990s.
Of course, most of us don't have the ability to buy millions of shares in a company and earn a dividend of this size. But even a small purchase could offer you much-appreciated annual income you can collect -- or reinvest into that same stock to increase your position. It's a win-win situation.
To maximize your dividend growth potential, consider Dividend Kings, or companies that have lifted their dividends for at least 50 consecutive years. This shows their commitment to dividend growth, so there's reason to be optimistic they'll keep boosting these payments over time -- and that equals growing passive income for you.
3. Focus on the long term
Warren Buffett has said Berkshire's favorite holding period is "forever." I'll refer again to Coca-Cola, one of Buffett's favorite companies. He and his team started buying the shares in the late 1980s and have held on ever since.
As we've seen, Berkshire has benefited significantly from Coca-Cola dividends -- but also from the stock's performance over that time period. If Buffett sold the shares during some of the periods when performance stagnated, he would have missed out on the gains that followed.
So it's crucial to consider a company's long-term potential, and if prospects are strong, hold on even during times of general stock market weakness -- or when the company's industry temporarily falls out of favor with investors. For example, during economic rough patches, stocks linked to consumer spending may suffer even though some have what it takes to win over time.
To follow in Buffett's footsteps, don't be bothered by near-term trends and movements and instead remain focused on a company's ability to grow earnings over a period of years. If the future looks bright for this player, you'll want to stick with it -- and potentially win over the long term, just like Warren Buffett.
