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HOW TO INVEST LIKE WARREN BUFFETT
By Nicolai Bang from www.finans.dk
*This interview with Stig Brodersen was originally published 27 June in Danish here
It requires discipline, time, and composure to invest like the 85-year-old billionaire and major investor Warren Buffett. But, even though you might not get to build a fortune and become world’s third richest person, you should strive to copy him anyway.
At least according to Stig Brodersen. He is behind the world’s largest podcast on equity investment, and he and his co-host Preston Pysh have written the Warren Buffett Accounting Book, which has sold just over 20,000 copies. A book describing the billionaire’s investment strategy in detail.
“I’ve adopted his strategy 100%. Buffett’s simple way of investing and his ability to be rational when everyone else is irrational, it’s all incredibly inspiring,” says Stig Brodersen.
And it’s not hard to invest like Warren Buffett, unlike what most people probably imagine. At least not in theory. His method is relatively simple and based on fundamental assumptions. Principles that most will be able to learn to abide by. On the other hand, it requires that you respect the rules of the strategy and that can be difficult for many investors.
According to Stig Brodersen, the first thing you must learn, before plunging into investing like Buffett, is understanding what to invest in.
“A share is part of a business. So many people don’t understand this. If you own a share in Maersk, you own a small portion of a container ship, a small portion of an oil platform, a small part of everything. In theory, it is no difference between to buying a single share and buying the entire company. You need to understand this in order to understand the business,” he says and points out why it is important.
“What happened during the financial crisis? Many companies’ value was halved. If you understood the business, you would see that this did not make any sense. Many companies still operated in the same way, and generated the same cash flow. How could these companies all of a sudden be worth only half of what they used to? Perhaps the shares were overvalued before, or maybe they were undervalued after – at least it demonstrates the value of rational thinking, especially when everyone else is doing the opposite. “
Warren Buffett acted rationally during the financial crisis and used the declining stock prices to buy into healthy, robust companies that, despite the crisis, kept moving at roughly the same pace. Actually, such opportunities are exactly what Warren Buffett is always on the lookout for. This is also why he considers patience as one of the most important features when investing in shares.
However, he wouldn’t have been able to do what he did if he hadn’t understood the companies. If he hadn’t read the accounts and talked with those involved.
“Very few investors actually take the time to read the annual reports of the companies they invest in. Nevertheless, they should. It doesn’t matter whether the stock price has risen from 40 to 60, if the share is still overpriced relative to the company’s value. Buffett only looks at what the company is worth, “says Stig Brodersen.
When Stig Brodersen has read and understood the financial statements, he tries to get to talk the company’s clients, employees, or others who have special knowledge. Then he investigates whether the company has a special competitive advantage. It’s time consuming, but necessary and totally worth it.
“Why spend three days choosing the cheapest phone plan if you don’t want to spend three months placing all the money you’ve earned over the last 10 year in good, solid investments?”
Just like Warren Buffett, he is also looking at whether the lifespan of the company’s product is durable. Will the internet at some point replace this product? When Warren Buffett bought gum manufacturer Wrigley’s, he did so based on the logic that the Internet probably wouldn’t change the way that we chew gum.
Laying the groundwork is time consuming, but, in return, you only have to purchase very few shares.
“When I finally buy stocks, I intend to keep them for many years. If I buy two different stocks in one year, it’s more than enough. Warren Buffett has once said that if you’ve bought more than 20 stocks in your life, you’ve been too impatient. He obviously has done so himself, but the lesson is that you have to hold on to your stock for a long time. “
Suppose that the exchange were to close for 5-10 years. Would you then still buy the stock?
“It shouldn’t matter, because as a shareholder you own a part of a real business which is long-lasting. It’s not just an electronic piece of paper with a price that fluctuates up and down,” Stig Brodersen explains.
While it may be tempting to let others manage your investments, Stig Brodersen considers this a big mistake. You have to take care of your investments yourself.
“Nobody cares as much about your money as you do. Banks will only offer you a generic investment service based on a superficial survey about your risk preferences. Forget it. You need to find out for yourself what the right thing is for you. Moreover, you have to train yourself to figure it out. Team up with people who can help you. I also surround myself with many good people who help me. “
Warren Buffett’s company Berkshire Hathaway owns shares in 49 different companies, including large holdings in Kraft Heinz, Wells Fargo, and Coca-Cola. Therefore, if you want to invest according to the billionaire’s philosophy, but don’t want to spend time on it, you can just consider investing in Berkshire Hathaway.
Stig Brodersen does so himself.
