Want to Invest Better? Think Like Warren Buffett

Think Like Warren Buffett

Warren Buffett is probably the preeminent investor of our time. The combination of his investor returns, longevity, and folksy wisdom has made him very popular. Many small investors want to think like Warren Buffett. But what exactly does that mean and can you do it?

Most likely it does not mean replicating his portfolio or his buys and sales, though some investors may try. Buffett bought Coca-Cola (KO) and some other stocks decades ago, in 1994, when it was undervalued and expanding internationally. If you buy Coca-Cola today for the dividend and safety in order to copy Buffett’s portfolio, it is still the dominant soft drink company, but it is no longer growing as fast.

I have a written about Buffett before because investors can gain a significant amount of knowledge from him. A place to start is his annual investor letters. You can read then Highlights from Warren Buffett’s Annual Letter for 2021, 2020, and from 2019.

Biographies have also been written about Warren Buffett. But what does it take to think like Warren Buffett? Many investors try. It is unlikely that you will be able to replicate Warren Buffett’s success over an extended period of time. However, most everyone can still learn from him much like an everyday chess player can learn from reading about and following a Grand Master. The goal is to learn and improve your investing strategy and skill. With that in mind let’s see how we can think like Warren Buffett.

3 Things to Focus on To Think Like Warren Buffett

Stocks Are a Business

Stocks are historically represented by a piece of paper. Today, most of us buy and sell online and stock certificates and record keeping are mostly digital. But stocks are more than that.

Stocks represent ownership in a business. By buying a stock you are in investing in and becoming part owner in a business. So, the idea here is to think like Buffett you must think as a business owner, which is long-term. Yes, you may be able to make profits trading on market and stock price volatility. But if you are thinking like a long-term business owner then are probably going to hold the stock for years. You will get a share of profits through dividends that you can reinvest and leverage the power of compounding.

Wait for The Fat Pitch

To think like Warren Buffett, you must wait for the fat pitch. This is an analogy to baseball where Ted Williams would wait for a pitch in the specific area of the plate where he had a higher probability of getting a hit.

But Buffett’s thought process is much the same. He wants to swing for the fences when the right investment opportunity comes along. He suggests that investors act as if they owned a card with 20 investment choice punches in it. This would prevent investors from making bad investment decisions and improve their overall returns.

The advantage of this philosophy is really only opportunity costs meaning you lost out on gains from an investment. There is no penalty. However, if make a bad decision then you can lose your initial capital.

Intrinsic Value

To think like Warren Buffett, you need to be thinking about the intrinsic value of a company, which is how much is a business worth? To quote Buffett about this,

“Whether we’re talking about stocks or socks, I like buying quality merchandise when it’s marked down.”

The way Buffett looks at this is estimating future cash flows and then discounting them back to present time at an appropriate interest rate. This is a discounted cash flow calculation. There is a degree of uncertainty as future cash flows, and the appropriate interest rate are unknown. You must make some assumptions.

There are good articles about how to calculate intrinsic value like Warren Buffett. The idea here is that if you buy a stock trading below its intrinsic value, i.e., a discounted percentage, you are getting a deal. Once the market realizes the stock’s true intrinsic value the stock price rises. Of course, this requires patience.

Think Like Warren Buffett to Invest Better

Thinking like Warren Buffett is simple in theory. There are numerous books and articles about him and his investing philosophy. In practice, it may prove more difficult since some investors may lack patience. Buffett is patient if anything. For instance, Buffett had unrealized capital losses at the nadir of the COVID-19 pandemic bear market but did not sell except for airline stocks. Stocks rebounded after a brief downturn Buffett benefitted.

There is more to thinking like Warren Buffett such as margin of safety, ignoring market forecasts, reducing portfolio turnover, increasing your investment, looking at companies with wide moats, etc. However, the above three form the core principles of an investor seeking to think like Warren Buffett.

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