Warren Buffett Is Terrible at This Investing Strategy. Here's What He Does Instead

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Warren Buffett’s net worth qualifies him as the fifth richest man in the world. He’s built that fortune through investing, so he’s widely regarded as one of the most successful investors of all time.

Despite Buffett’s demonstrated ability to generate massive wealth as an investor, his skill set is limited. By his own admission, he’s not good at timing the market. In Warren Buffett’s own words: “We haven’t the faintest idea what the stock market is going to do when it opens on Monday. We’ve not been good at timing.”

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About market timing

When investors time the market, they are attempting to predict, and profit from, short-term market trends.

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A simple timing example

Say you believe strongly that the market is about to rebound from its current slump. Furthermore, you sense that certain stocks will show big gains in that rebound. Even if those stocks aren’t suitable for your portfolio long term, you buy them now at lower share prices. When the recovery comes through as you predicted, you sell and turn a quick profit.

The problem with timing

Timing as a profit strategy is challenging because the downside risk is very high. If your predictions are wrong, you have money tied up in stocks you never intended to keep.

At that point, you are stuck between the figurative rock and hard place. You could hold those stocks, which limits the cash you have available for new timing opportunities. Or you could sell them, probably at a loss.

Buffett’s alternative to timing

Buffett’s alternative to market timing involves buying good stocks at reasonable prices and holding them for the long term. There are two strategies embedded here: value investing and buy-and-hold.

Value investing

Value investors seek out stocks that appear to be trading for less than they’re worth. This means Buffett likes stocks that investors at large are underestimating. That’s not an easy job. It requires Buffett and his team to see potential where others do not.

If you don’t have a sixth sense for business value, you could lean on Buffett’s. To do this, you’d follow the 13F filings for the investment conglomerate Buffett chairs, Berkshire Hathaway. The quarterly 13F details Berkshire Hathaway’s long positions on publicly traded stocks — albeit with a reporting delay. Use those filings to see which stocks Buffett likes. You could then research those companies to see if they’re a good fit for your portfolio.

Buy-and-hold

Buy-and-hold is the opposite of market timing. Rather than chasing short-term profits, the buy-and-hold investor looks to gain from long-term market trends. To do that, they keep the same stocks for decades. (Buffett has said his preferred holding period is “forever.”)

Buy-and-hold is relatively easy to implement. You find companies with good fundamentals, buy them, and wait. Or, easier, buy-and-hold shares of a large-cap index fund, like Vanguard 500 ETF (NYSEMKT: VOO) or iShares Core S&P 500 ETF (NYSEMKT: IVV). These funds hold the largest, most successful U.S. stocks.

Notably, buy-and-hold involves not reacting to temporary stock market turbulence. This is because a normal, cyclical market downturn shouldn’t fundamentally change a business’s long-term potential. The stock price will dip temporarily, but solid companies will manage through. And when the market recovers, those stocks will too. In time, the good years outweigh the bad ones — and that’s when long-term shareholders reap the rewards.

So, while short-term investors struggle to time market peaks and valleys, the buy-and-hold investor benefits most by doing nothing.

Slow and steady, the Buffett way

Buffett doesn’t know where the market’s headed tomorrow and doesn’t care to guess. Instead, he relies on the stock market’s long-term growth trends to make money — and a lot of it.

The big takeaway is that you can mimic the Buffett way but on a smaller scale. Pick good stocks or funds and stick with them. Ignore temporary stuff. Let the market work its magic over the next 20 or 30 years. At the end, you’ll be richer and probably happier, too.

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Catherine Brock has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.