Invest Like Warren Buffett: Buy and Hold

Posted on October 24, 2012 at 12:34 PM PST by

Want to invest like Warren Buffett? The billionaire investor and chairman of Berkshire Hathaway (BRK.B) has this advice: Don’t sell your stocks. Buy and hold.

Easy for him to say, you might reply. After all, he has billions to invest, full-fledged insurance businesses rolling in cash, as well as a quarterly flood of dividends from his long-held positions. Few people can really invest like Warren Buffett, you might charge.

And you’d be right. It is easier to invest when you’re already rich.

invest like warren buffett

Nevertheless, Buffett’s advice on stocks is completely on target, even for ordinary mortals. People sell stocks far too fast and for all the wrong reasons. Rather than think like investors, they behave like over-caffeinated traders, jumping from sector to sector and ticker to ticker in hopes of catching a lift to instant wealth, all the while avoiding being dashed on the rocks.

The trouble with trading is that the cost of so much activity wipes out any chance you have to enjoy the upside of owning stocks. To invest like Warren Buffett, you have to get that upside, which can take time.

To invest like Warren Buffett, too, you have to look at stocks the way you do other investments in life. Nobody buys a small business with the idea of selling it in a week, a month, or even a year. The canniest of private equity investors knows that it can take years to turn around a business.

Private equity experts know that the cash flow from the business in the meantime is the reason you buy a business, not just the potential gain from an exit.

Likewise, until recently no one would take a mortgage on a home with one eye on the door. Yes, that happened during the housing boom, and look where those folks ended up. Experienced real estate buyers instead carefully weigh the cost of money, taxes, upkeep and the potential for appreciation.

Even so, real estate investors face the vicissitudes of the rental market while they own a home or commercial property. They do so with their eyes wide open to the risk of holding an empty building for months, maybe years.

Buffett uses similar comparisons, such as owning working farmland or an apartment building, in explaining his logic to CNBC. Stocks should be considered in the same light, he said:

“When you own stocks, you own pieces of businesses, and they’re wonderful businesses. You can pick the best businesses in the world.

“And to buy or sell on current news is just crazy. You’re in a wonderful business. You’ve got people running it for you. You know you’re going to do well over five to ten years. And to think news events should cause you to dance in or out of something that’s a wonderful game is a terrible mistake.

“So, get into a bunch of wonderful businesses and stay with them…”

Does Buffett sell stocks? Of course he does. Investors worldwide wait with bated breath for the latest insight on how to invest like Warren Buffett, contained in his annual letter to shareholders of Berkshire Hathaway, the holding company Buffett runs with partner Charlie Munger.

On occasion, he cuts back on large positions of his common stock holdings, often just to reinvest in other positions, sometimes to exit in order to buy something else. Buffett does occasionally make new buys. He purchased a big railroad company not long ago, Burlington Northern Santa Fe, as well as stakes in newspaper chains.

But very often he holds stocks for years, collecting the dividends like clockwork in order to reinvest. “Life is like a snowball. The really important thing is finding wet snow and a really long hill,” is how Buffett himself explained it, in a recent biography about his investing style.

Invest like Warren Buffett? Start small…

You could attempt to mimic Buffett’s style, seeking to invest like Warren Buffett by studying companies deeply and learning the true, intrinsic value they represent. Another method is to buy all of the companies in the market using an inexpensive exchange-traded fund (ETF), such as Vanguard Total Stock Market ETF (VTI).

If you don’t have Buffett’s deep pockets, nor the time and expertise he deploys in his decision process, you can still invest like Warren Buffett using an ETF that provides you exposure to stock market gains, as well as a flow of dividend cash. Like Buffett, too, you can use rebalancing to get a good feel for when the market is overvalued, suggesting a selling point has come.

Do you need to dump it all? Of course not. Again, to invest like Warren Buffett you would take the middle road, selling just enough of your equity position to lock in part of the gain while staying invested over the long haul.

For the retirement investor who cannot spend the time it takes to become Buffett, a balanced asset allocation model using inexpensive ETFs or index funds is the best, simplest, most effective alternative, a method Buffett himself has endorsed for small investors.