How to Invest Like Warren Buffett

“Be fearful when others are greedy and greedy when others are fearful”

— Warren Buffett

When share markets rise or fall, the maxim above from Warren Buffett often gets shared by investors alike. It would appear that the phrase is rather popular, and is a mainstream favorite among investors. It would not be surprising since Buffett is widely considered as one of the most successful investors in history. As the Chairman and Chief Executive Officer of Berkshire Hathaway Inc., Berkshire has achieved a compounded annual growth rate of 20% in its book value over close to 50 years.

However, I thought that I should also add the full text of this phrase, lifted from Buffett’s 2004 letter to shareholders of Berkshire Hathaway:

Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.

As you can see, I believe that the additional sentence prior to the favorite maxim does alter the context of Buffett’s statement by quite a bit, so I would much rather have the full context. In addition, I also believe that an over-riding advice from Buffett may come from another one of his quotes:

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

Similarly, as Foolish investors, our ultimate goal should be to find the best companies we can, with the aim to hold for the long term. As Buffett muses, we should be thinking out five, ten and twenty years from now. And — critically — I believe that we should always be looking out for these few exceptional companies that Buffett refers to in both times of greed and fear.

Foolish Take away

Looking for exceptional companies sounds simple, but is not easy. We may have to turn over many stones, and endure the trials and tribulations of the share market before we discover the select few companies that will decisively beat the Straits Times Index (SGX: ^STI). But fret not Foolish investors; my fellow Fool, Morgan Housel also shared the little tidbit below on another one of Buffett musings:

At last year’s Berkshire Hathaway shareholder meeting, Warren Buffett said he has owned 400 to 500 stocks during his career, and made most of his money on 10 of them. This is common: a large portion of investing success often comes from a tiny proportion of investments.

When we put all three quotes together, we can appreciate a richer context to Buffett’s musings on investing. I am convinced that if we continue looking for the best companies, and we will stand a better chance in finding, and holding some of them during our lifetimes.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway.