Key Takeaways
- If you want to invest like Warren Buffett, the first thing to focus on is strong businesses at fair prices.
- Hold core stocks for years and let compounding work, while ignoring short-term ups and downs in the market.
- Focus on companies with durable “moats”—advantages like strong brands, loyal customers, or unique technology.
Warren Buffett’s approach to investing sounds deceptively simple: buy great businesses, pay a fair price, then hold them for a long time while compounding does the work.
Even though he’s been running the same playbook for decades, his principles still apply today. The hard part is sticking to the plan in a world full of hot tips, social media trends, and 24/7 headlines.
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Find Good Businesses With Competitive ‘Moats’
Buffett famously seeks out businesses with specific advantages that keep others out, which he calls “moats.” These can be meaningful brand names, strong network effects, or simply being the lowest-cost producer in a market. Today, many of these moats are intangible: software, proprietary data, or a renowned brand name.
Practically, this means focusing on business quality first and price second. Look for real-world indications of quality like high customer retention, increasing subscriptions, or a passionate user base rather than trendy buzzwords:
- 10 or more years of steady sales growth, profits, and good cash flow.
- Stable or rising profit margins, even when costs change.
- Avoid firms with too much debt that may struggle to pay their bills.
- Companies that invest in good products, not pet projects.
At the same time, keep the following in mind:
- Protect your downside first: Favor companies with less debt, a broad consumer base, and recurring revenue. Avoid businesses where one shock can cause permanent losses.
- Stick to your price: Set a range for the price at which you’re willing to buy shares in the company. If the price moves out of your preset range, that’s all right. Missing a runaway stock is fine since protecting your capital is the most important goal.
Tip
How to Spot a Fair Price Without Overthinking It
Buffet’s approach to value investing involves rigorous fundamental analysis—poring over balance sheets to separate the good companies from the bad. For most everyday investors, however, this falls outside of their zone of competence. Instead, you can use some practical rules of thumb:
- Compare the company’s price-to-earnings and price-to-free-cash-flow ratios to its own historical performance, the industry average, and those of its key competitors. These are easily found on most investing platforms, including Investopedia. (For example, click on BRK.A, and underneath the chart, you’ll see both of these figures listed in the left-hand column.)
- Read the latest annual reports and earnings call transcripts. If you cannot explain in plain English how a business makes its money, skip it.
- Invest in a low-cost, broadly diversified index fund as your core portfolio. Buffett has repeatedly argued that regular investors should invest their money in funds that track the broad market.
Hold for the Long Term
Over time, good companies tend to outperform their peers, and active investing has generally had worse results than holding a passive index fund, like those that follow the S&P 500 Index (SPX).
The challenge is really behavioral, not intellectual. Build simple guardrails that make being patient easier, such as automating your investment contributions, rebalancing your portfolio annually, and avoiding daily checks on your brokerage account balance.
Stay within Your Circle of Competence
Buffett avoids companies that he doesn’t understand. He famously avoided technology companies like Apple Inc. (AAPL) for decades, missing out on a few giants, since he didn’t understand their core businesses. That doesn’t mean you should avoid tech (so long as you understand it), just stay within your circle of competence.
Pick a few industries you know or can learn about in depth (maybe pick those that relate to your job, hobbies, or area of study). Maintain a watchlist and read competitors’ filings and announcements to gain a deeper understanding of the sector’s landscape.
The Bottom Line
Buffett’s method calls for focusing on durable businesses, paying fair prices, holding your investments for years, and only putting money into companies you truly understand, with a margin of safety. If doing in-depth research is not your thing, make a low-cost index fund your core investment, then apply Buffett’s principles selectively where you have conviction. And remember Buffett’s words of wisdom: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”