How To Invest Like Warren Buffett in 2024

Who Is Warren Buffett?

Warren Buffett is a renowned value investor who has outperformed the stock market for several decades. He is the chairman and CEO of Berkshire Hathaway. The Omaha, Nebraska, native focuses on buying great companies at good prices. His birthplace inspired the “Oracle of Omaha” nickname that he still holds today.

Despite his long-term gains, Buffett is a cautious investor who doesn’t put everything into the stock market the moment he has extra capital. He has built up a large cash position as he awaits attractive entry points for his favorite stocks.

Warren Buffett’s Investment Strategies

Every investor buys stocks and other assets to make money. Studying top investors who generate higher returns than average can increase your likelihood of outperforming the stock market. 

Warren Buffett’s investment strategies are time-tested. He encourages most people to stick with index funds, but investors looking for an edge can use his strategies. These are the core components that helped Buffett amass a great fortune and get a high return on his capital for decades.

Invest in What You Know

Buffett only invests in companies that he knows, even if that means missing out on opportunities. The Oracle of Omaha has been investing for decades, so he has missed out on some opportunities despite outperforming the stock market by a wide margin. 

Although Buffett’s largest position is Apple, he usually avoids tech stocks. His preference to avoid this area has resulted in him missing out on opportunities like Amazon, Alphabet and Nvidia. Buffett has a stronger grasp of financial companies than he does tech companies which is why many of his holdings are in the financial sector. 

It’s risky to invest in companies you don’t know. A lack of knowledge of the company can also lead to panic if the stock’s price suddenly drops by 20% due to a bad earnings report. 

Investors who know the company and appreciate its long-term potential may decide to hold on to shares. People who know very little about the stock may sell for a loss and miss a potential rally.

Start With the Company

Don’t start an analysis by looking at a stock’s valuation or its historical returns. Each stock represents a share within a company. If that company performs well, investors will get rewarded in the long run. But if the company has many headwinds, shareholders will lose capital.

Buffett uses financials and valuations as guidelines, but he ultimately looks at a company’s economic value. He looks for cash-flow-producing companies that have expanding profit margins, and he’s more focused on what a stock can do in 10 years versus one year. Buffett covered three rules in a 2019 letter to shareholders:

“First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”

A good company isn’t always a good stock. Some corporations are great for early investors but do not offer margins of safety for new investors. Investors can wait for good-but-overvalued companies to enter corrections before accumulating shares. You can keep investments in your watchlist and wait for them to reach your desired price. 

But a bad company is always a bad stock. These types of businesses are losing market share and have bad financials. Year-over-year declines in revenue and earnings are two red flags, especially if peers in the industry are reporting solid financials.

Prioritize Domestic Investments

The Oracle of Omaha believes in the long-term prosperity of the United States and prioritizes stocks in U.S. corporations. Buffett has some corporations in his portfolio that aren’t based in the United States. But his exposure to international markets is small compared to his exposure to U.S. companies.

Focusing on U.S. companies can make investing less complicated. Buying companies that operate in different countries adds complexity since you have to stay on top of that country’s politics, tax laws, and other components. 

Review Financials

Buffett’s first rule of investing is to not lose money, which makes him more conservative than many growth-oriented investors. As a long-term investor, he relies heavily on fundamental analysis and doesn’t let technical indicators like 50-day moving averages dictate his investments. Buffett only considers profitable corporations. 

Buffett doesn’t gamble with unprofitable corporations that burn through cash. Some investments can generate high returns due to speculation or by becoming profitable. But if any part of the growth thesis changes, they can lose half of their value. 

Investors following Warren Buffett’s strategies should look for companies with high net profit margins that can expand margins in the future. Value investors also look for companies that can continue to grow their revenue and earnings each year.

Look for Moats

Moats are a reference to ditches that separate invaders from a castle. When castles are under attack, they can raise their drawbridges and become less accessible thanks to their moats.

Corporations use moats to make it more difficult for competitors to obtain market share. Businesses without moats are commodities that can be replaced and should have lower valuations. 

The largest holding in Warren Buffett’s stock portfolio is Apple due to its moat. Apple makes up half of Buffett’s portfolio. The total size of his position was $174.3 billion (905.56 million shares) at the end of Q4 2023. The company produces high-quality products that double as status symbols. The company’s technology, scale, and other resources are a strong moat that makes it hard for competitors to gain any meaningful traction. New entrants and multi-billion dollar corporations have an uphill battle if they want to take market share from Apple.

Assess the Valuation

Notice how much work value investors like Warren Buffett do before considering the company’s valuation. If a stock has a good underlying business, an investor can then move on to the next step of reviewing its valuation.

Value investors prioritize a stock’s price-to-earnings (P/E) ratio. The P/E ratio measures a stock’s market price against its earnings per share (EPS) over the past year. A lower P/E ratio is more favorable, but investors need more context before deciding on a stock. 

A tech stock with a 20 P/E ratio will look overvalued if you compare it with bank stocks. A stock valued at $100/share with an annual EPS of $5 per share has a 20 P/E ratio. But that same valuation may look reasonable if the average tech stock has a 30 P/E ratio. Some investors also use the PEG ratio and forward P/E ratio which let them assess a company’s future growth prospects. These valuations help out a company with a higher P/E ratio that is doubling its net income when comparing it to a company with a much lower P/E ratio that is flat. 

While the P/E ratio is a common metric among value investors, Buffett only uses it as a clue rather than a decisive factor. 

“The tough part is coming up with the intrinsic value. There is a lot more to intrinsic value than P/E,” he said in 2018. The P/E ratio is a guideline, and you will have to know more about the business to determine its true intrinsic value.

Invest for the Long Term 

In 1996, Buffet told Berkshire Hathaway shareholders, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” Buffett buys stocks with the intent of holding them for the long term. This requirement forces Buffett to narrow his focus on corporations with sound fundamentals instead of buying high-risk investments that are experiencing strong rallies.

It becomes easier to think and act like a value investor if you have a long-term perspective. Investors have to look for stocks that can thrive under any economic scenario due to the high demand for its products and services. Warren Buffett’s portfolio is filled with debit and credit card companies since consumers will always use their cards for purchases. 

American Express was Buffett’s third largest holding in Q4 2023. Berkshire Hathaway’s portfolio also includes a $2.16 billion position in Visa and a $1.70 billion position in Mastercard.

Even when people cut back on spending, they will still spend money with their cards to get perks and rewards. A 10-year time horizon also allows you to enjoy the benefits of compounded growth if you pick good investments. Compounding has helped Buffett trounce the S&P 500’s long-term returns.

It’s Okay to Sell If the Company Changes

Buffett has been known to buy and hold many corporations, but the Oracle of Omaha also sold some of his stocks. Investors shouldn’t rush to sell a stock just because the company reports one bad quarter. But any structural changes to the investment thesis can prompt a sale.

Buffett’s Berkshire Hathaway recently sold about one-third of its Paramount stake. The acclaimed studio cut its quarterly dividend from $0.24 per share to $0.05 per share in 2023. Buffett is a patient investor who sticks with corporations when they struggle. But a dividend cut is a big red flag for Buffett since he prioritizes companies with rising net profit margins.

A cut dividend is a sign of weakness. It means the company isn’t generating as much revenue or is experiencing a decline in net profit margins. Paramount’s dividend cut was significant and was part of the reason Buffett unloaded a large portion of his stake in the company.

Don’t Follow the Crowds

Zoom stock and companies like it soared during the initial stages of the pandemic. Some of these companies previously traded at reasonable valuations but then got out of control and no longer had margins of safety. Some investors chase momentum, hoping that they won’t be the ones left holding the bag. 

Warren Buffett isn’t the type of investor to follow the crowds and chase what is currently hot. He will look for stocks that haven’t received as much attention lately and accumulate more shares. Instead of buying momentum stocks like Zoom, Buffett invested $2.1 billion into Bank of America stock in 2020.

Following the crowd can remove critical thinking from the equation and result in investors leaning heavily into emotions instead of logic. Emotional decisions can lead to substantial losses and high-risk trades in an effort to break even. It’s easier to take a breath, sit back, and assess the situation if you ignore the crowds and market noises.

Reflect on Your Performance and Portfolio

Warren Buffett periodically assesses his portfolio. He will look it over and see what he can do better and determine if he can put some of his cash to good use. The best investors are honest with themselves and consider what went well and what didn’t go as planned.

Constant reflection allows investors to learn from their mistakes and make better decisions in the future. Some investors get burned for holding on to an asset long after the growth thesis has changed. Others sell investments too early because they do not understand them or panic about a bad earnings report. You can learn more about yourself and achieve higher returns by reviewing your performance.

Embrace Fear and Uncertainty

The stock market occasionally goes through periods of fear and uncertainty. Investors may sell off their shares at losses as the stock market continues to fall. While the stock market has endured many corrections and crashes, it has always rebounded from them.

Instead of panicking during crashes, Buffett loads up on stocks with his cash reserves. Buying at lower prices when people are rushing to get out of the stock market allows Buffett to enjoy more gains when investors return to the market. 

Buffett bought many bank stocks during the Great Financial Crisis, including a $5 billion investment in Goldman Sachs. Although he made a profit on these investments, Buffett received additional perks for these investments. For instance, Buffett bought preferred shares and also received warrants for an additional $5 billion worth of common shares. 

Goldman had the option to buy back its preferred shares from Buffett. The corporation bought them back in 2011 for $5.64 billion and paid an additional $500 million. Buffett also exercised his options on 13.1 million in common shares. 

People will always look for ways to make more money. Once the stock market shows some signs of life, investors will pour their capital into the financial markets again. It takes a lot of courage to get into the stock market when many assets are losing value. 

Build Up Your Cash Position

Having a large cash position and not putting all of your eggs in the stock market can make you feel more confident about holding your stocks and accumulating shares during corrections. Buffett has been an advocate of building cash for many years and practices what he preaches.

If you put all of your money in the stock market, you may pay more attention to the latest news. Any negative investment developments can cause more panic for investors who over allocate capital into the stock market. This problem exacerbates for investors who put most of their funds into one or two  individual stocks. 

Few investors have billions of dollars, but cash is relative. Setting up an emergency fund to cover six to 12 months of living expenses can give you more confidence when investing in the stock market. Investors with financial safety nets don’t have to worry as much if their stocks are in the middle of corrections. You can earn extra money on your cash by putting it into a high-yield savings account.

Jump on Great Opportunities

Buffett is a prudent investor who will sometimes miss out on good opportunities. But he encourages investors to jump on great opportunities. While a great opportunity varies for each investor, it’s important to capitalize on them. Buffett prioritizes stocks that are very unlikely to lose money instead of stocks that can potentially go to the moon. 

The legendary investor has jumped on many opportunities, but few of them were as well executed as his accumulation of American Express stock amid The Salad Oil Scandal of 1963. Allied Crude Vegetable Oil Refining Co. deceived American Express about its inventory. American Express gave the company a business loan under the assumption that it had $150 million in vegetable oil. But the company only had $6 million in inventory. 

American Express became a victim of fraud and saw its share price drop by more than 50%. It wasn’t clear who was responsible for the bill. Buffett was monitoring the stock before the scandal, but he used this opportunity to build a 5% stake in the company. The company eventually settled its claims and moved on from the incident. While many investors panicked and jumped ship, Buffett saw a compelling opportunity and built a large position in a short amount of time. 

Avoid Debt

Buffett doesn’t believe in using margin or any other type of debt to finance stock purchases. Using margin involves borrowing against your portfolio which will increase your purchasing power. You can generate more gains with this method, but combining debt with stock investing can lead to bankruptcy. The risks are too great for potential gains, and margin can wipe out any portfolio, regardless of its size.

Buffett only uses his own cash to make purchases. That’s easy to say for an investor with billions of dollars ready to go. But Buffett accumulated his wealth with these core principles in mind. While debt can make sense for real estate investors since mortgages are a necessity for most people, you shouldn’t take out personal loans or max out credit cards just to own more shares of the hottest stock in the market.

Pros and Cons of Warren Buffett’s Investment Strategies

Warren Buffett has consistently outperformed the stock market. It’s easy to view Buffett’s historical returns and assume that everyone should invest like him. The value investing principles he uses for his portfolio can lead to higher returns, but Buffett hasn’t been perfect. 

Buffett has missed out on stocks like Amazon and Alphabet. He is also missing out on the artificial intelligence boom. Investing in AI stocks constitutes following the crowd, which is a deterrent for Buffett. 

Understanding the strengths and weaknesses of an investing model can help you decide if it’s right for you. Investors can also decide if they want to make adjustments to a successful investor’s approach.

Pros

• Buffett’s long-term returns speak for themselves.
• A focus on long-term stocks means you’ll spend less time looking at day-to-day market news.
• Establishing a margin of safety minimizes potential downside.
• Analyzing a company’s financials and moat before buying shares ensures you have the right foundation. Then it comes down to the valuation.
• No need to know technical analysis, which makes it easier to conduct research.
• Value investors typically don’t hold on to the recently hyped stocks that crash during economic challenges.

Cons

• Sometimes, the crowd is right and is loading up on a stock that feels like a great long-term buying opportunity.
• Focusing too much on the P/E ratio can result in investors missing out on opportunities like Nvidia. 
• It’s good to focus on what you know, but investors should broaden their horizons and understand more industries. Buffett missed on Alphabet and Amazon in part because he did not fully understand their business models.
• Value investors risk temporarily getting left behind during periods of irrational exuberance.

Should You Invest Like Warren Buffett?

It’s hard to question Buffett’s long-term performance, but previous results do not guarantee future success. Buffett holds on to profitable companies that are often growing their revenue and earnings. But investors can consider some alternatives.

The first alternative Buffett himself recommends is to buy index funds. These funds let you achieve the same returns as the stock market. Buffett’s returns comfortably exceeded the S&P 500’s returns from 1965 to 2023. But the index still generated a very respectable 31,223% return. Investors have historically been able to achieve good returns without analyzing stocks and monitoring promising investment opportunities.

Investors should also assess their long-term financial goals before allocating their capital across several stocks. Some investors prefer to take fewer risks than Buffett and build dividend income portfolios. Other investors may want to pursue growth-oriented stocks with higher valuations. 
Even if you don’t want to invest like Warren Buffett, it’s good to learn from him when building out your investment portfolio. Some of the most successful investors still follow Buffett’s methodology.