How to invest like Warren Buffett

Warren Buffett is an investor who made billions, so what’s his secret? And what could we learn from him?
Man taking notes | Wealthify
Reading time: 4 mins

When you enter the world of investing, there’s a name that tends to come up: Warren Buffett. Known as the ‘Oracle of Omaha’, Warren Buffett is a multi-billionaire and one of the most successful investors of all time – think of him as a rock star in the investment arena! Many investors look up to him and wonder what his secret is. Well, luckily (for us!), for the last decades, Warren Buffett has been kind enough to share his investment principles. Here are five things you could do if you want to invest like Warren Buffett.

 

Do your research
Warren Buffett believes you should understand how an organisation works and makes money before you invest in it. And if you don’t get it, then, according to the man himself, you should avoid it completely – his key rule is ‘never invest in a business you cannot understand.’ But this doesn’t mean you should avoid these companies forever! Warren Buffett encourages every investor to keep learning throughout their journey. So, say you don’t understand how tech companies work, then why not do some research, and deepen your knowledge? For instance, you could spend some time reading their annual reports and any news surrounding the industry. But if you’re too busy to do the work or don’t feel confident enough about it, it could be a good idea to ask for help and use investment management services, like Wealthify, where experts research and pick investments on your behalf.

 

Spread your risk
Unless you’re an investment professional and are confident in your stock picking skills, Warren Buffett advocates for diversification where you get to spread your money across investment types and regions. By putting all your eggs (your money) in different baskets (investments), you could effectively reduce the risk of losing everything. Think about it, if you put all your money in one or two companies, you could be in for a nasty shock should these organisations struggle. Now by diversifying your investment portfolio, you could mitigate this risk as poorly performing investments should be balanced out by others doing well.

 

Ignore the noise
Seeing markets fall can be scary and the temptation to withdraw money can be very strong, however, according to Warren Buffett, it’s important to ignore the noise. The multi-billionaire entrepreneur invests his money in good times and bad times and tries not to pay attention to short-term market movements. Markets are like roller coasters – they move up and down and sometimes, the swings can be extremely abrupt, driving the value of your investments down. It’s certainly not nice to see your plan decline in value and the first thing you may want to do is take your money out to try and limit the losses. But by doing this, you may actually make the situation worse for yourself.

Say markets are falling and you withdraw your money because you’re afraid of losing too much. Now imagine, markets bounce back and values are going up, but since your money is out, it cannot benefit from the rebound. By panic selling, you’ve made your losses real and waved goodbye to any potential growth. So, what can you do when markets fall? Well, you could wait and see. This may sound counter-intuitive, but as long as your money remains in your plan, your ‘losses’ are hypothetical – it’s only a red number on your dashboard and with time, provided markets go back up, this number could go green again.

 

Consider passive funds
Warren Buffett is quite open minded when it comes to selecting investments. He’s known to actively pick individual shares but doesn’t mind investing in passive investment funds either. In fact, these last few years, he’s been praising them. Passive funds are like hampers full of different types of investments and the particularity about them is that they track specific markets. For example, some funds will follow the FTSE 100 (the main UK market index) and mimic its performance. So if you’re invested in them, you could expect to see your investment go down when the FTSE 100 is down, and vice versa, when the UK market is up, then your investment should follow and go up too. The good thing about passive funds is that they’re an easy way to diversify your portfolio, and they typically come with low fees – what’s not to love?

 

Think about the long-term
Warren Buffett thinks it’s generally a bad idea to try and time the market – by timing the market, we mean trying to predict when to invest and when to jump ship. Is that really a thing, you ask? Yes, it is! In fact, many investors believe it’s possible to guess where the market is heading next. But in practice, it’s a bit more complicated as most investors fail to make accurate predictions and can lose a lot of money in the process. That’s why Warren Buffett encourages investors to adopt a long-term view – in other words, instead of timing the market, it can be wiser to let time work its magic. Over the long-term, investing tends to pay off. According to many studies, the longer you remain invested, the more likely you are to make a gain. People who invested for any 10-year period between 1984 and 2019 have had an 89% chance of making a profit1 – needless to say, the odds here are in your favour.

 

Reference:

1: Data from Bloomberg

 

Past performance is not a reliable indicator of future results.

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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