Invest It Like Buffett
by Chris Rowe 10/21/08
First of all, Mr. Buffett starts by analyzing a company to find what he believes to be the company's intrinsic value, and he then buys the company at a significant discount to that value. This gives him enough confidence that he doesn't care how much the stock fluctuates in the interim, as long as he knows he bought the stock for much less than it's worth.
Joe Public doesn't typically have that kind of confidence, so he is liable to get shaken out of a stock at the first sign of danger, or when the stock declines by a large dollar amount. The reason Joe Public isn't confident enough to hold the stock is Mr. Public doesn't know how to analyze stocks like Mr. Buffett. So what does Joe Public do? He diversifies ... for safety.
But here's another Buffett quote: "Diversification is just a hedge for ignorance."
Diversification is an important part of prudent investing. But people diversify because they don't feel confident enough that they made good investments in the first place. But over-diversification is a bad trap to fall into, because if you are too diversified, you will match the performance of the stock market, at best, or more likely, you will underperform.
If you want to be assured that you'll match the market, you should buy SPDR S&P 500 ETF (SPY) to match the S&P 500, or Dow Diamonds ETF (DIA) to match the Dow Jones Industrial Average, or PowerShares QQQ (QQQQ) to match the Nasdaq 100.
If you want to invest like Buffett, and consistently outperform the general market, it's actually very simple. Buy shares of his holding company Berkshire Hathaway. If $130,000 per share is too much to shell out to buy one "A-share" of Berkshire Hathaway (BRK.A), then you can buy the "B-Shares" (BRK.B) for about $4,100 per share. Whatever you do, don't make the mistake of dismissing Berkshire Hathaway as an investment because you think you are better off buying cheaper stock that you can afford a larger number of shares of.
From March 2000 to March 2003 while the S&P 500 was down 40% and the Nasdaq down about 73%, Berkshire Hathaway B-shares were up 43%.
Since January 1998 the S&P 500 and the Nasdaq composite are just about flat while BRK.B is up over 150%.
Buying and holding Berkshire Hathaway is probably the best chance any individual investor has of matching what Warren Buffet can do on long-term holdings.
