How I use the Warren Buffett way to make money investing

When I think about Warren Buffett, the first thing that comes to mind is consistency. It’s the hardest skill to master for investors.

Any idiot (including me) can get lucky on a speculative bet. It’s like picking red or black at the roulette wheel. But following the Warren Buffett way will help me grow the biggest pile of long-term wealth.

So what does he do, and how does he do it?

Avoid risk to make money

Whenever someone wants me to get involved in high-risk investments, they always focus on the huge possible rewards. It’s funny how they never mention the crippling potential downside if it all goes wrong.

The thing that really made Warren Buffett a legendary value investor is avoiding risk. That might read like a boring sentence! But investing should be boring. When it starts getting risky and exciting, that’s when I start to lose money. And Warren Buffett didn’t make $88.5bn by chasing fads.

In the dotcom boom from 1998 to 2000, Warren Buffett’s Berkshire Hathaway was ridiculed for ignoring internet stocks. But it was this discipline for avoiding buzzy, overvalued companies that saved him.

From March 2000 to October 2002, the tech-focused NASDAQ fell 78%, losing all its gains from the bubble. Over the same period, Berkshire Hathaway gained 80%!

Warren Buffett: ignore the news

Take any flavour-of-the-month stock or asset. Bitcoin. The so-called ‘silver squeeze’ . GameStop. It’s generating huge amounts of headlines and investors are falling over themselves to throw cash at it.

As a value investor who follows the Warren Buffett system I want to do the exact opposite. I want to buy high-quality shares at the lowest-possible risk. 

That means buying good companies when no-one is talking about them. When prices are depressed and out of whack with the long-term value I think I’ll receive.

I can use his favoured valuation methods like price-to-earnings ratios to see if company shares are cheap. Warren Buffett also likes to focus on margin: that is, how much profit a company makes from the products it sells.

It’s just a fact that high-margin companies are more likely to recover from a short-term bad spell than those that have to spend a lot of money to bring in their cash.

Think price vs value

It took me an embarrassingly long time to figure out what Warren Buffett actually meant by: “Price is what you pay. Value is what you get”.

Often share prices really have no relation to how much value is on offer. Sometime the market is super-optimistic about a company’s chances of making profits. Sometimes it is super-pessimistic.

I want to follow the Warren Buffett way. That is: to buy companies with good track records when everyone else sees the glass as half empty, not half full. That way I can pay a relatively low price and get good value for my money.

It’s not a casino, a lottery ticket, or a get-rich-quick scheme. But this is the way I’ll grow my wealth long term.