3 Benefits of Investing Like Warren Buffett That Can Elevate Your Portfolio
Famed investor Warren Buffett, or “the Oracle of Omaha” as some know him, is a stock market legend and still relevant today. Its holding company Berkshire Hathaway is one of the largest companies in the world.
If you look closely at Berkshire, you’ll see tons of businesses, some of which it’s owned for decades without selling them. This is a stark difference from what you see talking heads on TV, always talking about the “hot trade” of the week.
So what can you learn from Warren Buffett that will help you make more money in the market? Here are three benefits of adopting Buffett’s long-term buy-and-hold approach to stocks.
Pay less tax
Taxes can be the silent killer of investment returns. When you sell an asset (eg stocks), your profit is called a capital gain. Of course, most governments will claim some of that profit with a capital gains tax.
In the United States, capital gains are taxed differently depending on how long you hold a stock. Profits on shares held for less than a year, or short-term capital gains, are taxed as ordinary income.
Now, if you made a successful sale and made a significant profit, those gains could be hit with a higher tax rate if they move your total income into a higher tax bracket – up to 37 % in the USA.
Profits from a stock held for more than a year, or long-term capital gains, are taxed at a lower rate, between 0% and 20% depending on your tax bracket. This can mean paying thousands less in taxes on a large sale. In other words, the IRS rewards long-term investors, so don’t look for a gift horse in the mouth!
Fundamentals and patience create less stress
The stock market has been referred to as a “casino” by some, likely due to the irrational volatility that occurs there daily. Many things can move stock prices in the short term; look at the ups and downs of growth stocks over the past six months! There is always a headline, government statistic or geopolitical event that can drive the markets up or down. It’s almost curious why so many people try to “outsmart” the market when it’s so random.
Meanwhile, a company’s fundamentals tend to determine share price over a period of years. If you own a growing, profitable business with competitive advantages, the market will usually pick it up at some point and reward it with a higher price.
You may have the next Amazon, but even that stock went from $100 to $10 in the early 2000s. Was Amazon a healthy company one year and near bankruptcy the next? No, just the market being irrational as it does from time to time. Lesson? Focus on the fundamentals and give companies time to show off their skills. Anything in the short term is more of a guess than anything.
You won’t trip over your own feet
Finally, Warren Buffett is not trying to be smarter than necessary. Good stocks are hard to come by, and Buffett doesn’t complicate things when he finds one; he holds it until it’s not great anymore. That’s why certain stocks have been Berkshire Hathaway staples for decades.
He could tell you himself that his biggest mistake was trying to do too much. He sold waltz disney twice, costing him as much as $31 billion in potential winnings.
The broader data confirms what Warren Buffett discovered for himself: the more you trade, the worse your investment returns tend to be. Sometimes there are good reasons to sell; a failed investment thesis or unethical management are great reasons to pull out of an investment. However, when investors try to be the smartest people in the room, it often backfires.
The ten second takeaway
There is so much to learn from Warren Buffett and his long career. Its long-term investment strategy is a simple compass that retail investors can follow and benefit from.
Managing stock volatility isn’t easy, and finding good investments is like finding a needle in a haystack. But you can make it easier for yourself by borrowing some wisdom from Oracle’s success. Find winners, keep them, and let them do the heavy lifting on your wealth-building journey.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.