He’s called the Oracle of Omaha for good reason. Warren Buffett — all-around investing genius and founder of Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) as we know it — has the stock-picking track record to support that unofficial title. While his conglomerate may have gotten off to a slow start coming out of 2020’s pandemic-induced market plunge, its share price is up nearly 24% year to date, while the S&P 500(SNPINDEX: ^GSPC) has risen by just under 21%. That’s a big difference when you’re comparing a buy-and-hold portfolio to an index-based benchmark. Plenty of investors would be thrilled with that sort of edge. Beating the market is tough to do!
And yet, it’s not crazy to believe you can not only beat the market, but perhaps even beat Buffett at his own game. The trick lies in successfully doing what Berkshire Hathaway is mostly unable to do, and doing what Buffett doesn’t particularly like to do. Here’s a look at the three biggest things you can do differently than Buffett in your investing strategy.
1. Invest in the types of growth stocks he typically doesn’t consider
Berkshire Hathaway’s portfolio has certainly evolved from its early, value-oriented days. For instance, its biggest single stock holding right now is Apple(NASDAQ: AAPL) — a company that Buffett might not have even dreamed of investing in a couple of decades ago (though Buffett may not have made the Apple buy call on his own). Software company Snowflake(NYSE: SNOW) is another relatively curious addition to Berkshire’s collection of stocks, in that it’s quite unprofitable and will remain so for a while.
Nevertheless, most of Berkshire’s positions are in established value companies like Bank of America(NYSE: BAC), Verizon(NYSE: VZ), and Coca-Cola(NYSE: KO). Buffett likes them because, first, he understands their business models, and second, they pay reliable dividends. It also doesn’t hurt that steady-performing value stocks have historically managed to catch up with and even surpass the hot-and-cold track records of gains that growth stocks tend to dish out.
It’s just possible, however, the market has outgrown its resilient-but-lukewarm love for value stocks. Since the mid-1990s, growth stocks have rather reliably outperformed value names despite their higher volatility. Overall, as a group, they’ve gained nearly three times as much as value stocks have over that timeframe.
That’s not to suggest there’s anything inherently wrong with investing in value stocks. But refusing to be at least a bit speculative leaves the sort of gains that have been dished out by growth companies like Facebook and Nvidia on the table.
2. Step into an entire position on a dip
As a small retail investor, you enjoy one advantage that giant players like Berkshire Hathaway don’t have: When you put a few thousand bucks into a trade, the market doesn’t even notice. Relative to your needs, there will almost always be plenty of any particular stock available to buy or sell at the current market price at any given time.
When you’re trying to put a few hundred million or even a couple billion dollars into a particular equity though — as Buffett typically is — it catches people’s attention. In some cases, it can even meaningfully move a stock’s price, perhaps unwinding the pullback that made the stock so attractive in the first place.
Gallery: 15 Reasons to Invest in the Stock Market in August (The Motley Fool)
The market’s expensive right now, but that shouldn’t stop you from investing
1. Even with some companies trading at sky-high valuations, other top stocks are still trading at bargain prices
2. Buying fractional shares of top-notch companies can help you expand your portfolio faster and brighten your long-term investing horizon
3. You can prepare your portfolio for the next market crash
4. You can expand to multiple streams of income by investing in dividend stocks
5. You can allocate your investments according to your personal risk tolerance
6. You can work on building a rock-solid investment portfolio able to withstand the test of time and various market conditions
7. You should be investing with a long-term buy-and-hold strategy
8. You should be routinely investing in top stocks that can generate sustained returns over time
9. You can find the investing strategy that works best for you
10. Invest in high-performing stock sectors to boost your long-term returns
11. You don’t have to be rich to invest
12. You can capitalize on the performance of your favorite companies and industries
13. Long-term investors can always find attractive stock buying opportunities
14. It might be time to recalibrate your portfolio
15. You can diversify your portfolio
The beauty of long-term investing is that you don’t need to try to guess when to buy stocks
Don’t misunderstand. The prospect of moving the market doesn’t prevent the Oracle of Omaha from steering Berkshire into or out of trades. But the conglomerate has to be smart and patient in how it moves. You don’t, so you can buy all the shares you want to (finances permitting), whenever you want to, on most pullbacks.
Of course, this assumes you’re actually willing to step into new positions on their way down rather than waiting until they’re on their way back up… which you should be. The key is pre-picking your preferred price point and sticking to it. As Buffett himself has even said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” — even though he often has to fight for that fair price. Precision-timing the entry misses the point.
3. Learn about different industries and diversify your holdings
Of the $323 billion worth of equities currently owned by Berkshire Hathaway, Apple accounts for 40% of the collective value. Financial stocks like Bank of America, American Express(NYSE: AXP), and U.S. Bank (NYSE: USB) make up another quarter of the portfolio — and that doesn’t count the financial services firms among the conglomerate’s wholly owned subsidiaries, such as Geico Insurance or Berkshire Hathaway Reinsurance. Buffett is also heavily exposed to industrial names, both publicly traded players and Berkshire-owned companies like Lubrizol and several railroad-related businesses.
Conversely, he’s arguably underexposed to technology stocks, materials, healthcare, and consumer-facing companies.
That’s not a fatal flaw. Buffett has often touted the investing philosophy of “buy what you know,” which is wise. His acolytes aren’t straying too far from that advice, though they may know more about certain businesses than Buffett does.
But it’s not as if this willingness to concentrate his portfolio too much in familiar industries hasn’t occasionally come back to haunt him. Berkshire took a bath on its investments in Delta Air Lines(NYSE: DAL), Southwest Airlines(NYSE: LUV), American Airlines(NASDAQ: AAL), and United Airlines(NASDAQ: UAL), which it sold early last year when the pandemic first rattled markets. Less exposure to the air travel industry would have reduced the pain the portfolio suffered in the first half of 2020, and perhaps prevented Berkshire Hathaway from underperforming the S&P 500 last year.
You should still understand the business model of any company you buy. But, rather than eschewing unfamiliar businesses, it might be smart to learn about some new ones so you can spread your risk out across more sectors.
10 stocks we like better than Berkshire Hathaway (A shares)
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Berkshire Hathaway (A shares) wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Facebook, Nvidia, and Snowflake Inc. The Motley Fool recommends Delta Air Lines, Southwest Airlines, and Verizon Communications and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.