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How to invest like Warren Buffett

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Invest like Warren Buffett

Self-made billionaire Warren Buffett has been called the greatest investor in the world.

So it should come as no surprise that the Berkshire Hathaway CEO has scores of investors hoping to follow in his footsteps by adopting his investing principles.

Former hedge-fund manager and Buffett follower Whitney Tilson attributes the 89-year-old's success to his "off-the-charts smarts," his more than seven decades of experience and his temperament.

"What he does is simple in concept but difficult in practice," said Tilson, now the founder and CEO of Empire Financial Research and publisher of a daily subscription newsletter. He has attended 21 Berkshire Hathaway annual shareholder meetings in Omaha, Nebraska.

"There are a lot of people, myself included, who have tried to do what he does, but he has done it better than anyone for a longer period of time," he added.

Buffett, who is worth $83.4 billion according to Forbes, began investing as a child. He bought his first stock when he was 11-years-old and he's been doing it ever since.

Buffett, on right, and his two sisters standing outside their childhood home.
Source: Warren Buffett

His philosophy is simple enough: Don't speculate, invest in quality companies and hold them for the long term.

"Buffett shows incredible patience waiting for investment opportunities to present themselves; when they do, he takes maximum advantage of them," said Gerald Jensen, a professor at Heider College of Business at Creighton University in Omaha — Buffett's hometown.

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Warren Buffett
Berkshire Hathaway CEO

Among those who have adopted Buffett's style of investing is Danielle Town. The idea of buying stocks scared her until she realized there was a way to do it that really excited her.

"I wanted to stop being a reluctant investor and I realized that I could start to invest like Buffett, billionaire style," said Town, who chronicled her transition to investor in the book, "Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad)."

"Buffett doesn't talk about investing like this, but I believe he falls in love with the companies that he invests in and we can do that too," she added. "It's about integrity in our investing choices."

If you want to take a page from Warren Buffett, here are some of his key principles you can integrate into your investing practice.

Ignore daily market moves

Buffett doesn't pay much attention to the daily ups and downs of the stock market.

If fact, when asked about it during Berkshire Hathaway's 2008 annual meeting, Buffett said "forget about the word 'stock.'"

"What we see when we look at the stock market is we see thousands and thousands and thousands of companies priced every day," he said.

"We ignore 99.9% of what we see, although we run our eyes over them. And then every now and then we see something that looks like it's attractively priced to us as a business."

Find good companies

Buffett waits for the right company to come along at the right price, Town said.

He's well-known as a value investor, which is someone who chooses equities that seem to be trading for less than their intrinsic value.

Coca-Cola is among the companies in Berkshire Hathaway's portfolio
Contributor | Bloomberg | Getty Images

However, he has also been incredibly successful at avoiding value traps, said Jensen. Value traps happen when investors think they are getting a stock at a discounted price but in reality, the business has a fundamental flaw that greatly reduces its intrinsic value.

"One explanation for this ability is that Buffett's main criterion for making a stock purchase is firm quality, whereas price is an important, yet secondary characteristic," Jensen said.

"By focusing on firm quality, Buffett avoids the allure of inexpensive stocks that deserve to be deeply discounted."

Buffett explained this philosophy in his annual letter to Berkshire Hathaway shareholders as far back as 1989.

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," he wrote.

Invest in what you know

Buffett has famously said to "never invest in a business you cannot understand."

"You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside," Buffett told CNBC's Becky Quick during an interview with "Squawk Box" in February.

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That doesn't mean he thinks you have to be an "expert" on every company. Investors need to have the "ability to correctly evaluate selected businesses," he wrote in his 1996 annual shareholders' letter.

Buy and hold

As far as Buffett is concerned, he's in it for the long haul.

"When we buy a stock, we would be happy with that stock if they told us the market was going to close for a couple of years. We look to the business," he has said.

"It's exactly the same way as if you are going to buy a farm," he added.

"You would not get a price on it every day and you wouldn't ask whether the yield was a little above expectations this year or down a little bit. You'd look at what the farm was going to produce over time."

Always keep learning

Warren Buffett, chairman of Berkshire Hathaway Inc., right, and Bill Gates, chairman and co-founder of Microsoft Corp., participate in a newspaper toss event at the Berkshire Hathaway annual shareholders meeting on Saturday, May 5, 2012.
Daniel Acker | Getty Images

Buffett is a big believer in continuously learning throughout life.

By the time he was 10 years old, he read every book on investing in the Omaha public library and many of them he read twice.

And he hasn't stopped. He has famously said he still reads about 500 pages a week.

"I remain very big on the idea of reading everything in sight," Buffett said in the 2007 Berkshire Hathaway meeting.

Tilson said to invest like Buffett, you need to become a "learning machine" for your entire life.

"You need to get on that steep learning curve at a young age and never get off," said Tilson.

Town, who hosts the podcast InvestEd with her investor father Phil Town, doesn't think investors need to be as extreme as reading 500 pages a week.

However, "the compounding of the knowledge has led him to be who he is and be the investor that he is," Town said. "We can do that. That's the practice of investing."

Is it the right move?

Jensen believes anyone can follow Buffett's basic investing principles.

"One of the worst things for investors is short-term trading or chasing the hot stock," he said. "Such strategies are tax inefficient, involve considerable transactions costs and often lead to ill-timed trades."

However, don't invest everything Buffett-style, warned Tilson.

In fact, he thinks many Americans are better off putting their money into index funds.

"Most people should just index their money and spend time with the family, reading good books and building their career," he said.

For one, actively investing your own money takes a lot of patience. And Tilson doesn't think all people are wired for that.

"The average human being wants to make money quickly," he pointed out. "There is no surer way to lose money quickly than trying to make money quickly."

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Watch Warren Buffett's full interview with CNBC's Becky Quick

It is also hard work. Even if you want to pick 5 or 10 stocks and hold them for a long time, it requires some effort, added Tilson.

So, if you want to invest like Buffett, do it with 10%, 20% or 30% of your total investments and put the rest in an index fund, he said.

Another way to invest like Buffett is to just buy shares of Berkshire Hathaway, he said. The company's A shares are out of reach for the average investor at more than $316,000 a share, but B shares are more affordable at $210.68 each as of midday trading on Thursday.

For Town, she found joy in investing once she adopted Buffett's approach.

"It's so much fun and it's such a beautiful experience of growth and happiness," she said.

"I think that's how Mr. Buffett feels and I think he'll be doing it forever."

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For more on Warren Buffett, check out CNBC's Warren Buffett Archive.

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