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HOW TO INVEST LIKE WARREN BUFFETT

By Scott Chan • October 30, 2024 • Stocks to Watch

Printable PDF

Editor’s Note: Warren Buffett, aka the Oracle of Omaha, one of the most
recognized and most successful investors of all time, has made billions of
dollars in his lifetime for Berkshire Hathaway (NYSE: BRK.A, BRK.B)
shareholders…and himself.

But Buffett isn’t some macho hedge-fund big shot taking huge gambles that make
(and lose) fortunes overnight. He has reaped billions by making a lot of smart
bets over the years. His success hinges on three characteristics: patience,
discipline, and risk aversion. Let’s take a look at those three keys to success,
one by one.


PATIENCE

The aforementioned trio of characteristics isn’t some magic elixir. Heck, it
doesn’t even sound all that exciting. But Mr. Buffett’s net worth of around $143
billion says that it works.

You see, movies and TV about the stock market usually take a lot of artistic
liberties. They dramatize and exaggerate what happens on Wall Street. Yes, wild
stuff does happen and some folks do crave action and risk millions of dollars a
minute. However, no one can be consistently successful over the long run without
at least one of the three characteristics followed by Buffett.

Let’s start with patience. There are few feelings better than making a trade and
within days generated a huge amount of money. Ask yourself though, how often
does that happen? You may get lucky a few times, maybe even more than that. But
you can also get unlucky, when a trade could immediately backfire and reduce
your gains from the successful trades.

If you’re able to consistently generate huge returns in a short amount of time,
count yourself in the small minority. You are either extremely lucky or you know
a great trading strategy.

For others, patience is a crucial quality. It’s the understanding that investing
requires diligent research and analysis to find quality assets, and then
allowing the asset time to rise in value.


DISCIPLINE

In short, discipline is about forming good investing habits and sticking to
them. Abiding by a clear set of rules helps you make rational investment
decisions. Discipline keeps you grounded.

For example, let’s say you carefully researched company XYZ and you really like
its stock so you bought some shares. But then the market starts to fall. To make
it worse, that company reports a disappointing quarter and lowers its revenue
and earnings guidance, which causes the stock to fall 15% overnight.

It’s all too easy to let emotions get the best of you in this situation and sell
first then ask questions later. A disciplined investor, however, will analyze as
much information as he can before he makes a decision and he will stick to his
rules.

Some examples of questions he might ask himself are: Given new available
information, does the stock still fit my investment criteria? If I am using a
soft stop loss strategy, has the stock price passed the threshold? If I sell the
stock, what other moves do I have to make to rebalance my portfolio to suit my
long-term goals?

Discipline doesn’t mean stubbornly holding onto a stock no matter what. Rather,
a disciplined investor tries to avoid acting impulsively. He tries to make his
decision based on rational factors. If the company had a bad quarter because of
temporary factors, the stock will likely recover. But if the bad quarter was
caused by more serious, longer-lasting headwinds, there’s nothing wrong with
moving on.


RISK AVERSION

When you see “risk aversion,” you may think Buffett recommends avoiding stocks
with high volatility—ups and downs—but that’s not the case. His definition of
“risk” is as a dictionary may define the term: the possibility of loss or
injury.

Buffett doesn’t really care how much an asset price fluctuates. As long as he
thinks he’s buying an asset (stock, company, etc.) at a low price relative to
the intrinsic value, he is happy. Think of the intrinsic value as an asset’s
“true” value, determined through fundamental analysis.

In contrast, the market price of an asset is set by buyers and sellers, so it
can deviate by a lot from the intrinsic value in the short term. But over the
long term, the market price tends to (but not always) move toward the intrinsic
value. The idea is that if you buy an undervalued asset, you will benefit from
both this move and (hopefully) an increase in the intrinsic value.

Note that Buffett isn’t looking to just buy something cheap. He is looking to
buy something that is undervalued. After all, paying next to nothing for
something that will be worthless in a year is still a bad investment.

So to Buffett, risk aversion is a matter of buying quality assets at as large a
discount as possible. It’s no surprise, then, that Buffett is known to be a
value investor.

To Buffett, risk is deterioration in the underlying intrinsic value. Market
price volatility to him is not necessarily a bad thing, because it creates
buying opportunity when a quality asset drops in price.

Of course, most people aren’t Warren Buffett. However, the basic lessons to
learn from him can benefit every investor: Have clear investment strategies and
goals in mind. Be disciplined and stick to those strategies and allow time for
those strategies to work. Distinguish between market price and intrinsic value.
Identify undervalued assets. If you are invested in quality assets for the long
haul, do not overreact to the market in the short term but continue to
reevaluate your investments.

PS: I just showed you how to invest like the Oracle of Omaha. But other
money-making methods deserve your attention.

Consider our colleague Jim Fink. He made a fortune for himself trading options.
Now that he’s a millionaire, he’s ready to tell all.

As chief investment strategist of Velocity Trader, Jim Fink has devised a
methodology that generates market-thumping gains…in up or down markets and
regardless of political uncertainty.



One of the most important presidential elections in our lifetime is just around
the corner. Many investors are nervous and hunkering down. But not Jim.

In a new presentation, Jim Fink explains the simple strategy he uses to rake in
gains of 104%, 164%, and 203%…in as little as 72 hours.

Can Jim’s election-year trades really be this profitable? Click here to find
out.


ABOUT THE AUTHOR

Scott Chan
Bio | Archive

Scott Chan moved from China to the U.S. with family at the age of ten. He passed
the rigorous entrance exam and attended the merit-based Stuyvesant High School,
widely held to be best public school in New York City. He earned undergraduate
degrees from New York University followed by an MBA degree from the Zicklin
School of Business at Baruch College.

Shortly thereafter Scott partnered with Dr. Stephen Leeb on numerous financial
publications. Today, he serves as the lead analyst for Real World Investing and
The Complete Investor.

Mr. Chan is an avid baseball fan and enjoys outdoor activities in his spare
time. A multicultural person, he reads Chinese and speaks fluent Mandarin and
Cantonese Chinese.

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