15 Ways to Invest More Like Warren Buffett

Warren Buffett is one of the world's best investors, and he's certainly earned that reputation, as shares of his company, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), have increased in value by 2,744,062% (yes, that's 2.7 million percent) between 1965 and 2019. Annualized, that's a growth rate of 20.3% -- far more than the S&P 500's (still solid) gain of 19,784% (or 10% annually) over that period.

Given his genius for investing, it makes sense to see if there are any of his investing ways that you might want to adopt for yourself. Here are 15 to consider.

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You might need to invest more like Buffett in only one way: using index funds. He has long admired the late John Bogle, father of the index fund (and founder of Vanguard), and Buffett has also directed the use of index funds for much of his personal wealth once he dies. He has given these instructions for the money left for his wife: "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)"

You, too, can invest much or all of your long-term money in a simple, low-fee, broad-market index fund. As Buffett has explained: "Consistently buy an S&P 500 low-cost index fund... I think it's the thing that makes the most sense practically all of the time."

ALSO READ: 6 Reasons Warren Buffett Is Such a Successful Investor

Another way to invest like Buffett -- if you can -- is to start when you're young. The longer your money has to grow, the more wealth you can build. Buffett was making money as a young child, and he bought his first shares of stock at the age of 11 -- in a company called Cities Service, which was a predecessor to Citgo Petroleum.

You may not be able to start investing at age 11 anymore, but however old you are now, there's a good chance you still have a decade or many decades ahead of you, and you might want to start parking some long-term dollars in stocks now.

Buffett has said: "Never invest in a business you cannot understand." That's why, for decades, he has remained within what he calls his "circle of competence" -- which encompasses the companies and industries he understands well. As his partner Charlie Munger has explained:

"The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much."

Joel Greenblatt, another well-known investment thinker, also believes in the circle of competence, saying, "It makes sense that if you limit your investments to those situations where you are knowledgeable and confident, and only those situations, your success rate will be very high."

Patience is another key attribute of anyone investing like Buffett. He has quipped, "Our favorite holding period is forever," and has said that he wouldn't mind if the stock market were only open once a year. If you look at his stock holdings that have grown huge over time, they've generally done so over a lot of time. For us individual investors, we should be buying into companies that we strongly believe have promising futures, and then hanging on to them for years. Consider Amazon.com, for example. Over the past five years, it would have grown by about 375%. But over the past 20 years, you'd have racked up a gain of more than 12,000%. Most stocks won't post such rapid growth rates, but the principle remains: Give long-term great growth stocks a long time to grow.

ALSO READ: Warren Buffett Is Throwing Billions at This Stock. Should You Buy, Too?

Many people ignore dividend-paying stocks, hoping instead to fill their portfolios with rockets about to take off. It's underappreciated, though, that dividend-paying stocks can be powerful growth boosters in a portfolio. Simply look at Buffett's portfolio for evidence of that. Consider that in his 2019 letter to shareholders he detailed the dividends Berkshire Hathaway received from its 10 largest stock holdings, which include Apple, Coca-Cola, and Bank of America. Those stocks together generated annual income of $3.8 billion. That's a hefty sum that Buffett can deploy into additional shares of stock or in other useful ways. Consider dividend payers for your own portfolio.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Buffett has opined many times that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." That's because a wonderful company is likely to be around for many decades, growing and rewarding shareholders, whereas buying into a fair company at a low price might give you a decent return in the short term, but it's not likely to give you great returns over the long run. In his 1989 letter to shareholders, he added, "when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements."

Buffett is one of the world's wealthiest people, and one way he achieved his wealth is by not spending lavishly. He still lives in the same house in Omaha that he bought in 1958 for $31,500, and he enjoys meals from fast-food outlets. He has explained that his main extravagance is using a private jet when he flies. He once bought his own jet and named it The Indefensible -- in part because he had criticized others for buying private jets. (He later jettisoned the jet and bought NetJets, a company selling fractional shares of jets to the wealthy, kind of like timeshares of vacation homes. That's how he travels now.) The lesson for us is to live below our means -- well below it, if possible. The more you save, the more you can invest, and that's likely to lead to a more comfortable retirement.

ALSO READ: Here Are the Stocks Warren Buffett Has Been Buying and Selling

Buffett has famously offered two key rules for wealth-building: "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1." You're not likely to get far investing in the stock market without losing a little money here and there, and possibly a lot of money on occasion. But you should be investing with a mindset that's firmly aiming to avoid losses. That means avoiding speculation, where you just take a flier on hot stocks you've heard about, and avoiding gambling, investing on margin (i.e., with borrowed money), penny stocks, day trading, and any other risky ways to try to build wealth. Instead, rely on tried-and-true investing strategies, such as buying into great businesses at fair or good prices and aiming to hang on for many years.

When investing, it's easy to want to jump into the market when lots of investors are buying stocks and to leap out when the market tanks and many investors are selling. Buffett's profitable style, though, does the opposite. Here's some advice he ladled out in his 1986 letter to shareholders:

"What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

It's dangerous for investors to view shares of stocks as lottery-like things that they hope will go up in value. Instead, we should be viewing each share of stock in a company as an actual piece of the company, albeit a small one. Shareholders are co-owners in the business, with a stake in its gains or losses. Buffett has long understood this, investing in many stocks heavily, often owning 5% to 10% or more of a company. In many cases, he has simply bought entire companies outright, adding them to his conglomerate. (Berkshire Hathaway subsidiaries include See's Candy, The Pampered Chef, Fruit of the Loom, GEICO insurance, and dozens of other businesses.)

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It's generally accepted that investors should diversify, spreading their dollars across a bunch of investments, to avoid having too many eggs in one basket. Buffett made an astute point, though, when he said at his 1996 shareholder meeting that "Diversification is protection against ignorance. It makes little sense if you know what you are doing." Here's his fuller explanation:

"If you know how to analyze businesses and value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably, because there aren't that many wonderful businesses that are understandable to a single human being, in all likelihood. And to have some super-wonderful business and then put money in number 30 or 35 on your list of attractiveness and forego putting more money into number one, just strikes Charlie and me as madness. And it's conventional practice, and it may -- you know, if all you have to achieve is average, it may preserve your job. But it's a confession, in our view, that you don't really understand the businesses that you own."

All that said, though, most of us aren't savvy investors, and for such folks, it can be best to be really diversified by simply investing in index funds.

ALSO READ: 9 Hard-to-Believe Warren Buffett Facts

No stock investor is likely to avoid ever making any mistakes. Even Buffett has made them. His partner Munger, on reflecting on Berkshire's first 50 years, said that "while mistakes of commission were common, almost all huge errors were in not making a purchase, including not purchasing Walmart stock when that was sure to work out enormously well."

You, too, will make mistakes -- perhaps by buying stocks you shouldn't, not buying stocks you should have bought, hanging on to certain stocks too long, and selling other stocks way too soon. For best results over your investing life, take stock of your mistakes and learn from them as you go. That way you may be able to minimize your losses.

Buffett is generally an optimistic guy. When the economy has faltered in the past, on many occasions, he has expressed faith in America's long-term promise -- and warned anyone to not bet against America. Melinda Gates has remarked on Buffett's optimism, too, in a 2017 letter from the Bill & Melinda Gates Foundation, to which Buffett has donated many billions of dollars:

"Optimism is a huge asset. We can always use more of it. But optimism isn’t a belief that things will automatically get better; it’s a conviction that we can make things better. We see this in you, Warren. Your success didn’t create your optimism; your optimism led to your success."

To be more like Buffett, you might want to be more generous. Consider his advice to the superwealthy: "If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%." Buffett has indeed thought of them, and he's already started to give his billions away, year by year. He plans to give the vast majority of it away, and to the Bill & Melinda Gates Foundation. Better still, he, Bill, and Melinda have established the Giving Pledge, getting billionaires to commit to giving away the majority of their wealth to charity. So far it has more than 200 very wealthy people on board.

Most of us shouldn't be giving 99% -- or even 51% -- of our wealth to charity, as we will need it for retirement. But it's worth remembering how much better we have it than so many billions of people, and to try to be generous and helpful.

ALSO READ: 5 Lessons From Investing Wizard Warren Buffett

Another way to improve your investing over time is to follow this Buffett example: Never stop learning. Buffett has noted, "Risk comes from not knowing what you are doing." That makes sense, because those not savvy about investing may end up losing lots of money on very risky ways of investing, such as penny stocks and day trading, and may make lots of other costly mistakes as well.

It has been estimated that Buffett spends around 80% of his workday reading and thinking. That includes both books and newspapers -- and a lot of annual reports, too. As he explained at his 1996 shareholder meeting:

"What I’m trying to do as I read reports… I like to understand just generally what’s going on in all kinds of businesses. If we own stock in a company and in an industry, and there are eight other companies that are in the same industry, I want to own or be on the mailing list for the reports for the other eight, because I can’t understand how my company is doing unless I understand what the other eight are doing."

You, too, can read gobs of annual reports online, and lots of Motley Fool articles as well, at Fool.com.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

The more you learn about Warren Buffett, the more impressed you're likely to be. There's a lot of wisdom -- both financial and personal -- to be gathered from the man, such as this telling definition of success:

"Basically, when you get to my age, you'll really measure your success in life by how many of the people you want to have love you actually do love you."

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian owns shares of Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Amazon, Apple, and Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short December 2020 $210 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.