If we just followed the simple rules of Buffet-style investing we'd all be a lot better off. So without further ado, here are the Buffet Investing strategy's four rules for investment success.
Rule #1: Avoid The Bread
What is the first thing awaiting you at the start of the buffet table? Bread. Sure it looks harmless, but do not be fooled. The bread is a trap!
Bread is there to distract you. It is the siren luring your mighty open plate onto the rocks of mediocrity. I get it. It's hot and it's fresh, and there is a little sachet of butter sitting next to it that you just know would melt in seconds. But did you really come here to fill up on bread like a sucker?
Much like your tabula rassa plate, the first step to building a Buffet Investing portfolio is to ensure you take your time, do your research, and ensure that you don't fill your portfolio with a bunch of mediocre 'me-too' businesses.
Which bring us to rule number two.
Rule #2: Sample Widely
To find the hidden gems of the Buffet we must leave no casserole cover unturned. It is easy to focus on the most obvious plates in front of us, but that is not where real value lies. Hiding under the next hard-to-reach steel lid could be some of the best Mongolian Black Bean Beef or Sweet and Sour Pork known to man! Sure… a lot of the time it will be half-cold steamed fish. But those disappointments are there as a test, to discourage the less dedicated.
Great Buffet Investors know that they will have to turn over a lot of rocks to find the very best investment ideas. Most of the time you will find stagnant and perpetually struggling businesses complaining about how the weather hurt their earnings. But every once in a while you will find a hidden compounding machine that is poised to take the market by storm.
And when you do…
Rule #3: Double Down on Your Winners
Once you have made your first pass and sampled all that the Buffet has to offer, now is the time for the pros to distinguish themselves from the rest of the pack. The second plate strategy is the "meat and potatoes" of serious Buffet Investing. Although if you know what you are doing it should involve a lot more than just meat and potatoes.
Each dish has its own strengths and weaknesses and the second round is the time to double down on the winners. Maybe there's a juicy Peking Duck, or some steaming-hot melt-in-your-mouth Lobster that just got wheeled out. Now is the time to pounce!
Double down on your winners and back yourself. When everything is aligned the true Buffet Investor is willing to stock up. Having a hundred things on your plate is a sure-fire path to disappointment. The "di-worsification" that plagues most of the investment world is not for you. There is only so much room on that plate of yours. Make sure it's chock full of only the highest quality offerings. You deserve no less.
Rule #4: Always Leave Room for Dessert
Hubris my friends. It is how the mighty fall.
If mediocre bread is the biggest trap for new players, then this is the biggest pitfall lying in wait for the experienced entrant that over-reaches.
How often have we seen a friend who started out strong, only to collapse before the finish line? They put away plate after plate of honey-baked ham and burger sliders, only to overdo it and peak too soon. They start to feel queasy. Beads of sweat form on their forehead. Soon they are heading for the parking lot. And before they can even touch the sweet candy wonderland that is the dessert buffet!
Although we might think we are on to a great thing early in our Buffet Investing adventure, we should be in no rush. The miracles of Buffet Investing do their best work over time, and we don't need to leverage up in the meantime. Always make sure we leave enough dry powder in our portfolios so that if an incredible investment opportunity comes along (like a hot caramel fudge sundae with chocolate sprinkles) we have the room to snap it up.
The Buffet Investing Way
Buffet Investing is an idea whose time has come. Unfortunately, there seem to be a lot of confused people out there. There are dozens of articles written every day about how to "How to Invest like Buffet!" or "Discover Buffet's secret!" but all of these are very wide of the mark. In fact, although they get the headline right, most of the time these articles make the highly embarrassing mistake of writing their analysis on the strategies of some guy named Warren (not even a system of serving food!).
If you ever come across one of these poor folks, please send them this article so they can discover the incredible power of Buffet Investing!
