Invest Like Warren Buffett

I received the latest issue of Fortune magazine in the mail the other day and found myself staring at the Oracle of Omaha, Warren Buffett.  The caption next to his photo basically says “Warren is ‘wild about’ such and such company, shouldn’t you be?”

Warren Buffett has found himself in the position of being something of a beacon of hope for investors.  He has spent his life investing and is quite successful at it.  So successful in fact, that he is one of the richest men on the planet (second only to Bill Gates as of this article).  With a reputation like that, there is no reason why the average investor shouldn’t follow his every move in order to become wealthy along with him, right?

I have a problem with following the advice of any single person blindly.  It boils down to doing what you are told rather than making informed decisions for yourself.  Why is following the moves of Warren Buffett any different than following the advice of Jim Cramer?  Is it because Buffett has proven himself to be wise and savvy in the ways of investing?  Is it because he knows more than you do?

Warren Buffett is not your average investor.  He has power, something you and I do not possess.  He is able to invest in a company and sit on the Board of Directors, keeping the management team in line and offering advice and suggestions of how to improve the company.  His ability to do this helps him have control over the future of his investments.  Wouldn’t it be nice if you had that power?

What can you do to invest like Buffett?

The first thing you need to do is to find a company you might want to invest in and research that company.  Don’t listen to the advice of your cousin Joe and invest your money in the hot new stock.  By the time there is a “hot new stock”, it is too late and you’ll be jumping on board right before the stock tanks.  Follow these wise words of Mr. Buffett himself:

          “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This is a great philosophy for investing.  Had I followed this advice when I was trying to make a quick dollar by investing in Washington Mutual just before it went bankrupt, I probably wouldn’t have invested my money in them and would still have that money available to me.  Instead, I saw the possibility of making a quick dollar, and I could have if I would have pulled out sooner, but the end result was due to buying a weak company because of the price of its stock.

Another technique Buffett uses is buy and hold.  As Warren says, “Our favorite holding period is forever.”  Even the best day traders end up with returns inferior to those who buy and hold over the long term.  Why?  Commission and capital gains taxes.  For the little guys it doesn’t make sense to be actively trading.  We do not have the kind of money required to offset the commissions and taxes we would pay by making frequent trades.  Your best chance at success is investing in strong companies over the long haul.

Should you be following Warren Buffett’s every investment decision?  That is a choice you need to make as an individual.  If you were to ask The Oracle, I have a suspicion that his advice would be this:

         “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

That says a lot about whether or not you should be doing what Warren Buffett is doing, straight from the mouth of the Oracle himself.

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