Warren Buffett is a billionaire because he stuck to a buy-and-hold and value investing stock purchasing strategy. He’s been extremely successful at picking quality stocks that grow steadily in the long term. According to Buffett, “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”
The buy-and-hold approach to stock purchasing is fairly conservative in that the investor purchases very high-quality (non-risky) stocks and holds onto them for years. It is a long-term approach to investing and the investor makes money when the stock appreciates in value and through dividends. Because there’s little trading involved, the investor doesn’t hop from investment to investment, paying high fees and not realizing the stock's full potential.
Buffett couples this with the more active and slightly less conservative value investing approach. The same principles apply, but he takes it one step further. Buffett buys quality stock that is beaten down or undervalued due to economic conditions or short-term hiccups. According to Buffett, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
To implement this strategy, investors must first understand and pay close attention to businesses that have been hit by short-term struggles. If it appears the company can overcome its challenge (and if the research supports this), then an investor can exploit low share prices.
For example, many quality companies were hit hard by the financial crisis of 2008-2009. Their share values plummeted even though their fundamental qualities and business practices didn’t change. Based on the fact that the quality was still intact, value investors, including me, jumped into the market in the trough, buying high-quality, undervalued stock.
The intention of a value investor isn’t to make a quick buck - it’s to buy low and hold bargain-priced high-quality stock. Buying high-quality stocks and holding them for the long term make both the buy-and-hold and value-investing approaches conservative to moderate-risk strategies. The types of stock that can be described as “high-quality” and “less-risky” generally include regulated Canadian businesses.
To be successful at the buy-and-hold and value-investing approaches, you need access to research, an understanding of market cycles, and patience. Read any of Warren Buffett’s books or Janet Lowe’s Value Investing Made Easy.
You can see for yourself exactly what people like Buffett and others are buying by visiting morningstar.com, morningstar.ca, or the Securities and Exchange Commission website at www.sec.gov.