Like anyone interested in the stock market, many FTSE 100 investors are likely to have come across Warren Buffett’s stock picks, advice, or legendary tales. But few (if any) investors can match his long-term success.
What makes him almost unique is that he’s willing to teach us how to financially fish in the markets. Today, I’m going to share with you some of the essentials of investing like Buffett.
Buffett’s track record
Since the late 1950s, Buffett and his long-time partner Charlie Munger have transformed Berkshire Hathaway from a struggling textile manufacturer to a holding company with a market capitalisation greater than $550bn. The partnership has generated annual returns of around 20% – roughly double the average annual returns of the FTSE 100 index or the US stock market’s S&P 500 index.
Although this is an impressive difference in percentage returns, it’s only half the story. £1,000 invested 50 years ago in 1970 in an index fund with a 10% annual return would have become £117,390.85. The same investment in Buffett’s Berkshire would have grown to £9,100,438.15.
Here’s how the incredible effect of compounding comes into play over time when we have two asset classes that offer different levels of returns and performance. And it is possibly the primary reason Warren Buffett is one of the world’s richest people today.
How to invest like Warren Buffett
How does he do it? Buffet is known to spend a significant amount of time studying businesses and reading company filings with regulators as well as earnings call transcripts.
He also has several important principles he is known to have lived by all his professional life, including:
- Invest in what you know
- Learn the basics of value investing
- Find businesses that will stand the test of time
- Invest in good management
- Be contrarian during tough times
- Keep a long-term focus
There are no guarantees in investment returns. Yet the winning strategy he has been using for more than half a century may be appropriate for many retail investors too.
If you’d like to learn more about his philosophy, perhaps an even better way to get Buffett’s wisdom is reading his annual shareholder letter.
Buffett’s preferred industries
If you were to look all of his investments, you’d note that Buffett prefers
- Big or even mega-cap stocks
- Financials, including banks and insurance companies, followed by large consumer brands
- Stocks that pay dividends
Although his main holdings are US-based stocks, the FTSE 100 offers plenty of choices in industries that he’d have possibly considered investing had he been UK-focused. With this in mind, here are several large-cap shares I’m watching right now. I’d be willing to invest in them in February, especially if there is any dip in their share prices.
- Aviva – dividend yield 7.5%
- HSBC Holdings – dividend yield 6.9%
- Imperial Brands – dividend yield 10.5%
- Legal & General Group – dividend yield 5.4%
- Lloyds Banking Group – dividend yield 5.6%
- Standard Life Aberdeen – dividend yield 6.9%
- WPP – dividend yield 6.1%
As always, don’t regard these as formal recommendations. Instead, view them as a starting point for more research. I’d recommend doing plenty of homework to decide if they may be appropriate for your own long-term investing strategy.
Warren Buffett’s message is clear. The market could surge or fall at any time. However, if you’re buying quality shares, you don’t need to time the market. You can ignore the price swings if you own value stocks.
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tezcang has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has recommended HSBC Holdings, Imperial Brands, and Lloyds Banking Group and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). 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.