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3 reasons why investing like Warren Buffett could make you a millionaire

Without doubt, the greatest investor of all time is Warren Buffett. Nobody else has been able to generate consistently high returns over such a long period in order to become one of the richest people on earth. As such, it could be worth attempting to mimic the best bits of his investment style. Here are three steps all investors can take to try and match Buffett’s incredible success over a sustained period.

Cash is king

While many investors believe that having cash at any time is an inefficient use of capital, Buffett takes the opposite view. He keeps a significant cash pile on hand at all times. For him, cash is king.

The main reason for his love of keeping a sizeable proportion of cash in the bank is to capitalise on opportunities. Buffett is the type of investor who is always scouring the market for the best companies at the lowest prices. If he is able to find such a stock, having sufficient cash to act quickly can prove advantageous. That’s because situations can quickly change and what may be an enticing opportunity today may have disappeared tomorrow.

The maintenance of a healthy cash balance is perhaps most important during bear markets. It can provide a counterweight in terms of returns versus shares, while also providing the means to buy high quality stocks while they are trading at ultra-low prices.

Management strength

Buffett spends a lot of time focusing on management strength before buying a stock. Clearly, what makes a good or a bad management team is highly subjective, but focusing on results and track records can be a good place to start.

A management team which has a sound strategy and a clear direction for the business in question is a crucial aspect of investment success. Even a business with a loyal customer base, low cost base and diverse operations can experience difficulties if it is mis-managed. Therefore, focusing on the backgrounds of a company’s management teams, as well as making a judgement on their ideas and strategy, could be a means of improving your chances of becoming a millionaire.

Sector loyalty

While Buffett has invested in a variety of stocks in recent decades, his main focus has always been on companies which are able to develop a wide economic moat. This is often through customer loyalty and means many of his most successful investments have been in the consumer goods and consumer services sectors.

While such companies may not always outperform the wider market, they appear to offer a potent mix of defensive characteristics and resilient growth outlooks. With the emerging world continuing to see increased wages and rising demand for a range of consumer goods and services, seeking out stocks such as Unilever and Reckitt Benckiser could be a shrewd move. They may not be owned by Buffett at the present time, but they appear to have sufficiently wide economic moats to deliver rising share prices in the long run.

Finding the best stocks

Of course, finding stocks that are worth adding to your portfolio is a tough task, which is why the analysts at The Motley Fool have written a free and without obligation guide called 10 Steps To Making A Million In The Market.

It's a simple and straightforward guide that could make a real difference to your portfolio returns. It could help you to emulate Warren Buffett and generate high portfolio returns.

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Peter Stephens owns shares in Unilever and Reckitt Benckiser. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Reckitt Benckiser. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.