Invest Like Buffett: Lessons From the Oracle of Omaha

Last week, Warren Buffett announced that he is stepping down as chairman of Berkshire Hathaway. Earlier this year, he stepped down as CEO of the $1.1 trillion conglomerate after leading it for more than six decades. Under his leadership, Berkshire Hathaway delivered a compounded annual gain nearly double that of the S&P 500, making Buffett one of the greatest and most respected investors of all time.

Berkshire Hathaway today

Berkshire Hathaway operates as a holding company with a vast portfolio of wholly owned businesses and a large investment portfolio.

Its operating businesses span several major areas, including insurance and reinsurance companies such as GEICO and General Re, BNSF Railway, utilities and energy, manufacturing, and consumer businesses.

Berkshire’s equity portfolio, now totaling more than $350 billion, includes stakes in companies such as Apple (AAPL), Alphabet (GOOGL), and Japan’s major trading houses.

Buffett’s investing philosophy

Most investors would like to emulate Buffett’s investing style. While that is not easy, we can certainly learn from his strategies.

Buffett thinks like an owner, not a trader. His famous line that his “favorite holding period is forever” reflects his belief in letting compounding work over decades.

He also views market volatility as an opportunity rather than a threat, famously advising investors to be “fearful when others are greedy, and greedy when others are fearful.”

Another key part of Buffett’s philosophy is his strong conviction in “Never bet against America.”

Buffett’s preference for low-cost index funds

Buffett has long argued that most individual investors, and even most professional fund managers, struggle to consistently beat the market. He believes low-cost S&P 500 index funds are the best choice for most retail investors.

In 2007, Buffett made a public bet that a simple, low-cost S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over the 10-year period from 2008 to 2017. The index fund won.

The State Street SPDR Portfolio S&P 500 ETF (SPYM) is now the cheapest S&P 500 tracking ETF, with an expense ratio of just 0.02%.

Focus on high-quality businesses

Buffett looks for businesses with an “economic moat,” or a durable competitive advantage that protects long-term profitability from competitors. He favors companies he understands, with honest and capable management, consistent earnings power, and strong returns on capital.

Buffett’s focus on economic moats has evolved over the years. Early in his career, he often invested in deeply undervalued companies with limited remaining potential, which he called “cigar butts.” His philosophy later shifted toward buying high-quality businesses at reasonable prices. As he famously put it, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

The SPDR MSCI USA StrategicFactors ETF (QUS) aims to invest in high-quality firms with durable balance sheets and stable cash flows that trade at reasonable valuations. Apple, Microsoft (MSFT), and NVIDIA (NVDA) are among its top holdings.

Buffett’s bets on Japan

Buffett has also increased Berkshire’s stakes in Japan’s five largest trading houses while effectively hedging the currency risk. Buffett has told shareholders that Berkshire plans to hold these investments for “50 years or forever.”

The WisdomTree Japan Opportunities Fund (OPPJ) assigns about 45% of its weight to the “Buffett basket,” which comprises his original investments in the five Japanese trading houses, and incorporates a dynamic currency hedge.

To learn more, please watch the short video above.

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This article originally published on Zacks Investment Research (zacks.com).

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