What does Warren Buffett do differently that makes him so successful? Buffett started investing with less money than you have in your savings right now and turned it into his fortune today.
Was he just lucky?
Buffett hasn’t just been lucky for over 60 years. It’s because he invests differently.
In 1962, Warren Buffett was already becoming famous for crushing the stock market yet doing so with far less risk than the normal portfolio. In his 1962 partnership letter, he gave his clients an overview of his investing strategy.In that letter Buffett stated:
“We usually have fairly large portions (5% to 10% of our total assets) in each of five or six generals, with smaller positions in another ten or fifteen.”
What Warren Buffett meant by this is 50% of his stock portfolio were made up of five or six stocks and another 30% in about 10 other stocks. Buffett had 80% of his entire portfolio investing in about 20 stocks total.
He bought these stocks for two reasons which were that they we available to buy for a bargain, and they diversified his portfolio for safety.
What Does This Mean to You?
What Buffett is calling “diversification” is a portfolio with 50% in 5 stocks and another 30% in about 15 stocks. By today’s standards, this portfolio would be considered intensely focused and not at all diversified. Most fund managers today own easily over 100 stocks.
Mr. Buffett has changed nothing in the intervening years, except thathe calls what your fund manager is doing buying 100 stocks a vast “over-diversification” that is sure to result in mediocre returns, returns that are less than the stock market itself because of your fund manager’s fees.
Warren Buffett believes that the only way to beat the market is to buy really great companies when they are on sale.
This is investing.
Everything else is just gambling that the market will go up and you, the novice investor are doomed to lose.
Warren Buffett’s Core Stocks
The way Buffett’s strategy works today is the same as 50 years ago and perhaps even a bit more concentrated. He has about 75% of his portfolio in 6 companies which are KHC, WFC, KO, IBM, AXP, PSX
If you were to copy Warren Buffett, you’d buy 5 great, long-term stocks and get about half your money into them and after that, you’d add additional stocks to the portfolio by buying much smaller positions and then adding to those positions if the price dropped.
How Buffett Turned $100 into $30 Billion
Warren Buffett started with $100 and turned it into $30 billion by buying a few great companies that he understood and knew would be around in 20 years.
That means that it isn’t about the money you have, it’s about the knowledge you have. It means there are no real barriers to you getting rich if you’re willing to work hard and learn and put your money into stocks that you understand, rather than make a risky investment based on something a stock advisor told you.
Investing is about being patient and buying wonderful companies on sale. If you’re doing something else, you’re just speculating and gambling.
As Warren Buffett said, “There are only two rules to investing, Rule #1: Don’t lose money. Rule #2: Don’t forget Rule #1.”
About Phil Town: Phil is a 2x New York Times Best-Selling Author, Hedge Fund Manager, and Founder of Rule One Investing. He teaches everyday investors how to take control of their investment decisions without the help of financial advisors and grow their wealth using his values-based investing philosophy. Learn more about Phil at ruleoneinvesting.com.