Investing the Buffett way

It’s not hard to find an article about Warren Buffett’s investment strategies. I found a pretty fun one over at Yahoo! Finance’s that tried to give a list of “rules” that Warren Buffett lives by. I’m a big “practical advice” type of guy, so I would have preferred a bit more practical advice (see rules one and two, below). I’m also a realist (not a pessimist who thinks he’s a realist – an actual realist), so some of the advice in the article seems a bit unrealistic to expect the masses to do. So if you can’t dedicate enough time, you’re probably better off not investing the Buffett way. You’re probably better off investing the ETF way. More on that later.

According to Yahoo! Finance Warren Buffet lives by the following rules:

Never Lose Money;
Never Forget Rule No. 1;
If The Business Does Well, the Stock Eventually Follows;
It’s Far Better to Buy a Wonderful Company at a Fair Price Than a Fair Company at a Wonderful Price; and
Our Favorite Holding Period Is Forever.

I don’t mind the “rules,” and there are some pretty interesting bits in the article, but practical investment advice is lacking quite a bit. Rules one and two are a bit pointless. Let me ask you a few questions: Have you ever been about to click “send order” thinking “here we go – I should lost this money by next week at the latest – this is the perfect ‘lose money’ trade”? On the other side of the equation, have you ever bought a stock while (rationally) thinking there was “no chance” you would lose money? But the mindset advice in the article is spot on. These certainly are good qualities to have as an investor:

Don’t be frivolous. Don’t gamble. Don’t go into an investment with a cavalier attitude that it’s OK to lose. Be informed. Do your homework.

(I’m not sure why you would have the attitude that it’s OK to lose unless you’re gambling or speculating with “extra” money that you don’t want or need, but the rest of it is pretty good stuff.)

Rules three through five I really like though. Buying good companies really is key if you’re going to invest in single stocks with money you care about. And I agree with holding them long-term (long term isn’t four months). Those three rules combine for a relatively low-stress way to invest in single companies.

At the end of the day, unless you have time to invest in doing the homework and continuing to follow up on the companies you pick, you’re probably better off building a portfolio through low-cost ETFs. Most people should fall into that category. But if you want to buy some individual stocks, you could increase your chances for success by building a diverse portfolio and following Mr. Buffett’s strategy. (I do. I’m not saying not to. But if you do, do it the right way.)

If only it were as simple as that, right?

But you can do it. It just takes quite a bit of patience and homework.

Until next time, put your credit card down and slowly step away from the mall!