Buy it Like Buffet – Updated for a Strong Market

In our previous installment of “Buy it Like Buffet”, we described what Warren Buffet does in the midst of a market downturn. In a recent interview, Buffet discussed his strategy in a rising market. Surprising for many, Buffet has the same strategy – buy quality companies and hold on to them.

After decades of investing in which he’s made billions of dollars for himself and his investors, Buffet has been remarkably consistent in his strategy. Some key points are relevant in both bull (up) markets and bear (down) markets.

1. Buy quality companies. Buffet stresses that regardless of the market, the key is to find quality companies in good industries with good management teams. Focus on those companies that can create long term value and try to avoid making bets on companies that might have buzz.

2. Buy and hold. Buffet believes that investors should avoid the temptation of trying to predict the best times to buy and sell stocks. His strategy has always been to find companies and stay with them while the company builds value.

3. Don’t try to time the market. Related to the previous comment, Buffet acknowledges that it is harder to find bargains in bull markets than in bear markets. In fact, Buffet loves a market downturn so that he can pick up some bargains. But he made it clear that he is still buying despite the fact that markets are approaching all time highs. The reality is that no one knows whether the market is on the verge of a correction, or on track for another year or two of gains. So Buffet’s advice is to avoid trying to guess on the direction of the market and instead practice consistent investing, focusing on quality companies.

So, how can we translate that advice to the individual investor? Let’s look at each of Buffet’s strategies:

1. Buy quality companies. Any good portfolio should focus on quality companies. If you want to take a “flyer” on a start-up or a risky bet (Bitcoin, marijuana), make sure you keep those investments limited to a small part of your portfolio.

2. Buy and hold. We don’t recommend day trading for the ordinary investor and active trading (buying and selling frequently) should be done by professionals. A better strategy for the individual investor is to find good companies (#1) and hold the stock, selling only to rebalance the portfolio or when you need to start pulling money out of your investments.

3. Don’t try to time the market. Practice continually investing, ideally though automatic withdrawals at work into your RRSP. If Buffett doesn’t believe he can identify a bottom or a top of the market, you are unlikely to be successful either. Having said that, there are certainly some adjustments that can be made when markets are clearly hot or cold – you may want to overweight on equities after a crash and start to move your position out of equities when the market is clearly heading up (like now). Your financial advisor can help you with these strategies.

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