How to Apply Buffett's Investing Secrets to Your Portfolio
Warren Buffett is hands-down the most followed investor in the world. As the Oracle of Omaha, he has lead his firm, Berkshire-Hathaway , to outperform the S&P 500 since 1965. In fact, Berkshire has a 10% lead over the S&P during that period, and only fell short of the index's gains in nine of those 47 years -- that's pretty impressive stuff. So if you want to try to emulate the great one, below are five of his top investing strategies, and current opportunities that you may find when using the Buffet method.
1. Never lose money and 2. Never forget rule No. 1
It's only fitting to start with this pair, because Buffett himself ascribes the top spots to them. But since Warren is a savvy investor, he knows that in the market, it's impossible to never lose money. So what the Oracle is really trying to tell you is to go into investing with purpose and with knowledge. The market can be a confusing place, and there are days when stock activity cannot really be fully explained; but if you invest in companies within your "circle of confidence," you'll have a better time determining factors that will truly effect your stock. Know the business, know the company, and you'll know if it's right for your portfolio.
The financial sector is a big part of Buffett's circle of competence. A lot of the banks recently had a great upswing due to positive results from the Federal Reserve's stress tests. Unfortunately for JPMorgan , the news wasn't so great. The Fed found weaknesses in the bank's capital plan, and requested that it provide a revised plan by the third quarter. This may seem like a big deal to the average investor, but if you read a bit closer to the Fed's response, you'd find that it did not outright deny JPM's capital plan, leaving the bank plenty of room to distribute capital to its shareholders. In fact, the bank has recently announced that it will pay a $0.30 per share dividend, which is a solid forward yield of 2.44%.
3. Be fearful when others are greedy, and greedy when others are fearful
Fear and greed are two of the primary forces driving the stock market -- there's even an index from CNNMoney that measures the degree that these factors affect the market on any given day. One of the biggest tricks to finding the right stock and sticking with it is to detach yourself from the mob, and not get caught up in fire sales and the like.
Bank of America is a prime example of how fear and greed can move a stock without a ton of reasoning behind it. Because the bank is one of the most traded (and most watched) stocks on the market, there's a huge amount of volatility to its stock price. Investor sentiment towards the bank can shift multiple times in a day without much hesitation, but if you take a look at B of A's recent performance in the stress tests and otherwise, you'll see that there is little reason for investors to be concerned about the fundamentals of the company.
4. "Our favorite holding period is forever"
Buffett and the Fool both promote long term investing, with the guidance that you should really only invest in stocks that you would be willing to hold onto forever. The merit behind long-term investment horizons is two-fold. It requires you to do your research, and pick companies that will perform well for a long time, and it gives you the ability to ignore short-term blips and panics.
Perfect example -- AIG . The insurance giant fell to its knees during the financial crisis, but has since risen to its feet once more, and has a very promising future. If you followed rule No. 3, and invested in AIG at it's lowest point during the crisis, you would have already quadrupled your money, with plenty of upside left. The company continues to trade well below its tangible book value, so long-term investors have a great opportunity to ride the stock back up to its full value. Another famous money manager, Bruce Berkowitz, fully intends on seeing this rise happen in the next five years.
5. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price"
This rule was intentionally saved until last because price is such a tough issue to figure out when investing. Buffet found himself in a quandry when he was weighing the chance to invest in Wal-Mart. He set a target price, but found that the stock never dipped that low -- leaving him and Berkshire investors out of millions of dollars. This rule is very important because it allows you to leave pricing low on the totem pole of factors when weighing in on opportunities. Though price will always be important, being comfortable with a company, familiar with its business model, and confident in its ability to perform long-term are far better reasons to invest than hitting a target.
Niche insurance provider Markel is a perfect example of this final rule. Currently trading at $505.85, Markel is 25% above its book value per share, and may not appear to be quite a catch (especially if you're a value investor). But, considering the fact that the insurance company has one of the best investing track records during the past 10 years, the premium doesn't really detract from the company's appeal. Since CIO Tom Gayner joined the company, it has had a cumulative gain of 102% -- not shabby for an insurance company that needs to make its money through investing or increased premiums.
Sum it all up
With the five rules listed above, you have some of the most potent investing advice that can be found in the market. But be sure that you're not just following the moves of the great investors -- rule No. 1 will always be the foundation of a good investment portfolio.
Thanks to the savvy of investing legend Warren Buffett, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging, and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy, as well as important risks to watch out for. Click here now for instant access to Joe's take on Berkshire!
The article How to Apply Buffett's Investing Secrets to Your Portfolio originally appeared on Fool.com.Fool contributor Jessica Alling has no position in any stocks mentioned, but you can contact her here. The Motley Fool recommends American International Group, Berkshire Hathaway, and Markel. The Motley Fool owns shares of American International Group, Bank of America, Berkshire Hathaway, JPMorgan Chase & Co., and Markel and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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