Here's what you need to know if you want to invest like Warren Buffett

Wednesday, 18 December 2019

Berkshire Hathaway shareholders pose with a cutout of Chairman and chief executive Warren Buffett.

OPINION: So you want to invest like Warren Buffett.

Buffett is America's best-known investor and the chairman and chief executive of Berkshire Hathaway, but he's also a philanthropist who is generous with his gains. Considered one of the most successful investors in the world, he's worth an estimated US$84 billion (NZ$127.9b). He bought his first stock when he was 11, and he's been doing it ever since. His philosophy is simple enough: Don't speculate, invest in quality companies and hold them for the long term.

Here are some tips you can take to be more like Buffett in 2020 - and some of his quotes to inspire you.

Warren Buffett is the United States' best-known investor.

* Investors roll up to Hatch for Marijuana stocks

* Do you have the mindset of a billionaire?**

Start with what you know

'Stick to what you know and your circle of competence.'

With share investing, a good place to start is with a company that you know. Think about the brands you buy or a product that everybody loves. While there are no guarantees with share-picking, if you love a brand, and your friends or colleagues do too, then there is a chance the company behind it is successful - or has the potential to be. When you buy shares, you purchase a personal stake in that company, so you're essentially backing the future of that company.

Consider a company's advantage

'Never invest in a business you cannot understand.'

Invest in the brands you know, love and understand. Think about how the company makes money. A clothing retailer's main business is selling clothes, whereas a streaming service is a monthly subscription. Consider if the company has a competitive advantage - ideally, there's something about the business that's hard to imitate. This could be intellectual property, highly innovative manufacturing, licensing, massive distribution reach, to name a few. Popular consumer companies with brand recognition that command a loyal following can also give a company an edge - the harder it is for competitors to copy the business, the stronger the competitive advantage.

Keep an eye on the news

'I just sit in my office all day and read.'

Warren Buffett spends five to six hours per day reading newspapers and corporate reports. We might not all have the desire to build an empire, but many successful people set aside time each day to learn. Consider scanning the news each morning to keep tabs on general market and economy news, or set up Google news alerts on the companies you're interested in and their competitors.

Wealth takes time and patience to grow

'Someone's sitting in the shade today because someone planted a tree a long time ago'

As far as Buffett is concerned, he's in it for the long haul. When investors buy and sell shares quickly and regularly, rather than letting investments sit tight and play the long game, they're active trading. Some investors rely on luck to invest their money when a stock is on the rise, only to pull it out when its share price is plummeting. But trying to time the market is not the best strategy. The market is volatile, so there's a reason to let your money ride the wave; over time, the peaks should outweigh the valleys.

Find what works for you

'Just buy an S&P index fund and sit for the next 50 years.'

Picking individual shares can be time-consuming, which is why many investors turn to exchange-traded funds which bundle many stocks together. When individual companies come together into a diversified portfolio, they have a lot of power: The S&P 500 index - which includes approximately 500 of the largest companies in the US - has posted an average annual return of nearly 10 per cent since 1928.

The Oracle of Omaha's portfolio

'Another way to invest like me is to buy shares of Berkshire Hathaway.'

Today, Berkshire Hathaway is the largest holding company in the world, owning more than 50 companies including Duracell, GEICO, and Dairy Queen and large investments in the likes of Amazon, Apple, Bank of America, Coca-Cola, numerous major airlines - and many, many more.

In many ways, the team at Berkshire Hathaway are comparable to fund managers - they're always on the lookout for companies with growth potential, and when they find one, they invest in it or acquire it. If you invest in Berkshire Hathaway, you're investing in all the businesses that they own or have a stake in, and when they win, you win.

If you were lucky enough to invest in Berkshire Hathaway shares at pretty much any point in the last 20 years, you probably owe a lot of your portfolio's success to Warren Buffett. Under his management, the price for one Berkshire Hathaway share has skyrocketed from US$70,000 to its current price of US$340,000. BRK.A consistently outperforms the share market as a whole and has proven more resilient than the S&P 500 during recessions in the last 50 years, making it a go-to stock for many investors.

Since Hatch offers fractional shares, though, you don't need $340,000 to get your piece of the pie - you can buy however much you're comfortable with and grow your investment over time.

Kristen Lunman is general manager of investment platform Hatch.