If you want to invest like Warren Buffett, you don't need to do anything extraordinary. In fact, many new investors are surprised at the uncomplicated investment style of the Oracle of Omaha. Buffett invests in great businesses trading for less than their intrinsic values, and then he holds the investments for as long as they remain great businesses.
Obviously, there's more to the story than that. In this article, we'll dig a little deeper into Buffett's investment style, provide some real-world examples of how he's implemented his investment philosophy, and list the stocks he does (and doesn’t) invest in.
Warren Buffett's investing philosophy in 9 steps
Much of Buffett's investment process is proprietary, so we don't know exactly how he researches investments. But here are some of the most important Buffett investing principles that you can incorporate into your own investing strategies:
1. Look for a margin of safety.
Prioritizing a margin of safety is a cornerstone of Buffett's investment philosophy. In simple terms, a margin of safety refers to characteristics of an investment that help to protect investors from losing money. For example, if a stock trades for $10 per share, but the company's assets are realistically worth $12 per share, then there's a $2 margin of safety. The intrinsic value of the assets should prevent the company's stock price from declining too significantly.
Buffett's goal is always to pay less than a company's intrinsic value. As he says, "A too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."
2. Focus on quality.
Warren Buffett doesn't invest in junk. You typically won't see him buying struggling businesses, regardless of how cheap they become. One of the best Buffett quotes new investors can absorb is, "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
3. Don't follow the crowd.
Here's another piece of Buffett advice that is extremely important for beginner investors, especially in the modern age of Reddit message boards: Don't buy certain stocks just because everyone else is. But also do not aim to always be a contrarian and sell the stocks that everyone else is buying. As Buffett does, the best way to invest is to ignore the crowd entirely and focus on finding value on your own.
He also says, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."
4. Don't fear market crashes and corrections.
The obvious goal of stock investing is to buy low and sell high, but human nature can compel us to do the exact opposite. When we see all of our friends making money, that's when we feel like we should try to make money, too. And when stock markets crash, it's our nature to get out before prices drop any further.
Buffett loves it when stock prices drop since it creates opportunities to buy at a discount, which explains why 2022 has been a particularly active year. If you were shopping at your favorite store and suddenly learned that the entire store's prices were 20% lower, would you panic and run away? Of course not. Buffett embraces discounts on his favorite stocks and says, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
5. Approach your investments with a long-term mindset.
One of the most important Warren Buffett quotes on investing that you can take in is, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."
He doesn't choose stocks just because he thinks their prices are going to rise this week, this month, or even this year. Buffett buys stocks because he wants to own those businesses for the long term. He still sells stocks frequently and for a variety of reasons, but he approaches most of his investments with the mindset of owning them forever. And, if you can't get into a "forever" mentality with your stocks, Buffett argues one of the best investments most people can make is a set-it-and-forget-it investment such as an S&P 500 index fund.
6. Don't be afraid to sell if the scenario changes.
A famous Warren Buffett quote from when he was asked about an investment he decided to sell at a loss is, "The most important thing to do if you find yourself in a hole is to stop digging."
While he certainly wants to own every stock he buys forever, the reality is that outlooks change. It might surprise you to learn that Buffett bought a large position in mortgage agency Freddie Mac (FMCC -0.03%) a couple of decades ago. But a few years before the financial crisis of 2007-09, he noticed the lender's management had started to take unnecessary risks with the company's capital and decided to sell. When the financial crisis hit, it became clear that Buffett had made a smart move.
7. Learn the basics of value investing.
Warren Buffett is widely considered to be the world's greatest value investor. Value investing prioritizes paying low prices for investments relative to their intrinsic values.
A value investor's goal is essentially to buy $100 worth of a company's stock for less than $100 -- ideally, much less. Value investors seek out and invest in companies with intrinsic values that are well above the enterprise values implied by the prices at which the companies' stocks trade. Value investors like Buffett expect that the market will eventually recognize the full value of an undervalued company, resulting in an increase in the company's stock price and a profit for the value investor.
8. Understand compounding.
Warren Buffett is perhaps the best example of the power of long-term compounding. Buffett uses compound interest, dividend reinvestment, and the power of constantly reinvesting the operating cash flow generated by Berkshire's businesses to his advantage. How powerful is this? Berkshire has averaged a 20.1% annualized return since Buffett took over in 1964, compared with 10.5% for the S&P 500. This may not sound too spectacular until you realize that, over time, this has resulted in a 3,641,613% total gain for shareholders versus just 30,209% for the S&P 500.
9. Research and reflect.
Buffett regularly spends long days in his office in Omaha, Nebraska. It often surprises investors to learn that he spends the majority of his time just sitting alone and reading or not doing anything at all. He's been quoted as saying, "I insist on a lot of time being spent, almost every day, to just sit and think."
Buffett views knowledge as something that compounds over time, and he believes that much of his success can be attributed to the accumulation of as much investment knowledge as possible.
Which stocks does Warren Buffett invest in?
The stock portfolio of Berkshire Hathaway (BRK.A -0.64%) (BRK.B -0.45%) is worth hundreds of billions of dollars, and most of the stocks were selected by Buffett himself. Although Berkshire's portfolio holds about 50 different stock positions, almost three-fourths of the portfolio's value is concentrated in just five stocks. Here's more information about each of these top holdings:
1. Apple (AAPL 0.7%)
The tech giant's stock is the largest holding in the Berkshire Hathaway portfolio by a wide margin. Berkshire owns 5.7% of Apple’s stock, which was worth more than $136 billion as of late 2022. Buffett loves Apple not only for its "sticky" customers -- it's tough to imagine a company with a more loyal customer base -- but also for its pricing power and top-notch leadership.
2. Bank of America (BAC -2.42%)
Berkshire owns 12.9% of Bank of America's stock, and it was the company's second-largest stock investment as of late 2022. Buffett is a big fan of Bank of America CEO Brian Moynihan and the rest of the bank's management team. The company’s stock regularly trades for an implied valuation relative to the book value of its assets that is below its big-bank peers. Bank of America is also an excellent dividend stock, prioritizes share buybacks, and has grown at one of the fastest rates in its peer group in recent years.
3. Chevron (CVX -0.99%)
The newest addition of the top five, Buffett has been aggressively investing in Chevron in 2022 as oil prices have been elevated. Berkshire now owns 8.4% of the energy giant, a stake valued at about $29 billion in late 2022. Berkshire owns several major energy subsidiaries, so this ties in well with Buffett's affinity for the sector.
4. Coca-Cola (KO -0.22%)
Berkshire is a major investor in the beverage giant, owning 9.2% -- $24 billion at the time of this writing -- of the company's stock. Buffett started accumulating Coca-Cola stock in the late 1980s, and it's been one of his most successful long-term investments. In addition to being a devoted customer, Buffett loves Coca-Cola's brand power and massive distribution network, both of which give it competitive advantages over would-be rivals.
5. American Express (AXP 0.01%)
One of Berkshire's largest investments by percentage ownership, the company holds 20.2% of American Express stock -- about $22 billion at the time of this writing. Buffett has held its stock for 30 years. He loves the company's valuable brand name and its role as both a payment network and lender in its transactions.
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Which stocks does Warren Buffett avoid?
Buffett avoids investments he doesn't understand well. That's the main reason you won't find many high-growth technology companies or biotech stocks in Berkshire Hathaway's portfolio. They're not necessarily bad businesses or overvalued, but Buffett knows where his stock-picking strengths lie.
One final takeaway is that just because Buffett avoids a certain sector or industry doesn't mean that you also have to avoid it. You can invest like Buffett by sticking to what you understand.