Every so often we read an article about how you should invest like Warren Buffett in order to achieve success in the stock market. But, does following Warren Buffett’s investments really do any good or is it simply better to imitate his approach? After all when Buffett invests a few billion in a company its price commonly goes up. And, investing just after the stock price goes up is not an especially good idea. The Street just published an article about how to invest like Warren Buffett.
In a letter to his Berkshire Hathaway (BRK.A – Get Report) (BRK.B – Get Report) shareholders in 2013, Buffett said his advice for the average investor “could not be more simple.” He suggested putting 10% of cash in short-term government bonds and 90% in a “very low-cost” S&P 500 Index fund. In that letter, Buffett suggested Vanguard’s variety of funds.
If index funds aren’t for you, look out for some of Buffett’s “moats” — as in the water-filled ditch that keeps a castle safe from attack. Buffett has called positive free cash flows, good return on capital and strong competitive advantages within an industry “moats” for companies.
Investors can flock to those moated names by investing in a basket of Buffett-like stocks through Motif automated investing service for $10 a trade. Although Buffett hasn’t approved any himself, the Motif fund focuses on similar investing techniques.
The point is not necessarily to buy what the Oracle of Omaha just bought but to follow his suggested approaches of either using an index fund or looking for solid companies with a strong competitive advantage, high cash flow and low debt. Additionally, Buffett says he does not invest in a company unless he can see how it will be making money five or ten years from now. He has said that he is not sure how a tech product will be doing in a few years but has a fair idea that Snickers bars and Coke will be popular and profitable.
Matching the Market Instead of Beating It
Buffett is famous for saying that anyone who bets against the American economy and American industry is crazy. He has also said that by the year 2100 the S&P 500 will be a million. For those willing to stay the course and trust the market there are profits to be made. FT Advisor discusses passive strategies for long term gains.
Passive investing has become the strategy of choice for thousands of investors. Satisfied with duplicating market returns instead of beating them, these investors buy index trackers or the like and own tiny pieces of thousands of stocks, earning returns from the upward trajectory of corporate profits over time via the stock market.
Observers need only to look at the industry flows of the past few years to judge how significant index investing has become. Yet by definition these strategies will only ever perform in line with their index, minus the small cost of investing.
Are you a passive or active investor? Read our article and see if you should follow Buffett’s investments or his advice.