Warren Buffett's Investment Strategy

Here's something that might surprise you. 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 that trade for less than their intrinsic value and holds the investments for as long as they remain great businesses.

Of course, there's a little more to the story than that.

In this article, we'll dig into the investment style of the legendary investor. We'll provide some real-world examples of how he's implemented his investment philosophy and discuss the stocks he does (and doesn’t) invest in.

1. Look for a margin of safety.

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, that provides a margin of safety. The intrinsic value of the assets should prevent the company's stock price from falling too far. Or if it falls, the stock will become more attractive.

Buffett's goal is always to pay less than a company's intrinsic value.

2. Focus on quality.

Warren Buffett doesn't invest in junk. Early in his career, he would often focus on businesses that were in decline but still had some value. But this changed decades ago.

You typically won't see Buffett 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 (RDDT +2.10%) message boards: Don't buy certain stocks just because everyone else is buying them or talking about them. On the other hand, 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 independently.

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.

Here's what I mean by that. When we see all of our friends and colleagues making money, that's when we feel like we should try to make money, too. We are tempted to invest our money in stocks.

And when stock markets crash, it's our nature to wait it out on the sidelines. So, it's tempting to sell "before things get any worse."

Buffett loves it when stock prices drop since it creates opportunities to buy at a discount. This is why Buffett was extremely active in the stock market in the years immediately following the 2008-09 financial crisis.

Buffett takes advantage of discounts on his favorite stocks. As he 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. To be clear, in practice, Buffett sells stocks frequently, but he approaches most of his investments with the mindset of holding them for the long term.

It's also worth noting that if you can't adopt a "forever" mentality with your stocks, Buffett argues that 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.

Here's a great example. It might surprise you to learn that Buffett bought a large position in mortgage agency Freddie Mac (FMCC -3.65%) a couple of decades ago. A few years before the 2008-09 financial crisis, he noticed that the lender's management had started taking 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 regarded as 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, such as Buffett, expect the market to 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 Hathaway (BRK.A +0.36%) (BRK.B +0.13%) has averaged a 19.9% annualized return from the time Buffett took over in 1964 through the end of 2024, compared with 10.4% for the S&P 500.

This may not sound too spectacular until you realize that, over time, this has resulted in a 5,502,284% total gain for shareholders versus 39,054% for the S&P 500.

9. Research and reflect.

Although he doesn't have quite the stamina or energy that he once did (he is in his mid-90s, after all), Buffett regularly spent long days in his office in Omaha, Neb., throughout his career.

It often surprises investors to learn that he spent the majority of his time just sitting alone and reading, or just contemplating investment strategies. 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 accumulating as much investment knowledge as possible.

3. Coca-Cola

Related investing topics