Buy and Hold: Be an Investing Expert Like Warren Buffett

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John Divine
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How to be a buy-and-hold expert.

Warren Buffett made the buy-and-hold strategy famous in investing. And while some investors in today's fast-moving markets believe the technique is outdated and no longer useful, the data tells another story. The investment company run by Buffett, Berkshire Hathaway (ticker: BRK.A, BRK.B), still acquires stocks using a long-term philosophy to buy and hold stocks. There's no indication that the strategy has stopped working: Berkshire's stock price has soared 131 percent in the last 10 years, doubling the 65 percent return of the Standard & Poor's 500 index. It's not easy, but if you follow these nine steps you can buy and hold stocks, too.

Study the best.

To invest with the best, you've got to learn from the best. One of the reasons Warren Buffett regularly graces the ranks of the world's richest men is because he learned this lesson early. He came to admire and subsequently studied Benjamin Graham, who is widely considered the father of value investing. Value investing and the buy-and-hold strategy often go hand-in-hand, and Graham outlined his stock selection approach in the classic 1949 book, "The Intelligent Investor." Reading "The Intelligent Investor," as well as every shareholder letter from Buffett you can get your hands on, will instill in you the principles of this strategy.

Study the pitfalls.

No strategy is without flaws, and buying and holding equities is no exception. One of the more common critiques of the practice is that the fundamental outlook -- even the long-term outlook -- of a company can change in extreme situations, and in such scenarios you should take action and sell, rather than passively sit around and do nothing. Even the Oracle of Omaha, as Buffett is known, has made mistakes. His slow recognition of the e-commerce revolution that was challenging Wal-Mart Stores (WMT) caused him to dramatically underperform the market and miss out on billions in gains between 2005 and 2017.

Sustainable competitive advantages.

This is one of the most essential keys to the buy-and-hold investment strategy: looking for companies with sustainable competitive advantages. The only way a trading strategy like this works is if the companies you buy -- which, remember, you may hold for decades -- have what Buffett calls "moats," or sustainable competitive advantages that competitors can't mimic. Take Coca-Cola (KO), for instance. One of Buffett's most successful investments ever, Coca-Cola enjoys a patented secret recipe and over 100 years of branding that no upstart soda company will ever be able to match overnight.

Margin of safety.

It's not enough, however, to simply snap up stocks with sustainable competitive advantages. After all, you've got to buy at the right price in order for it to be a great investment. One day, KO stock may be trading at 40 times earnings, a lofty price for a mature soda company. A year later, if shares are going for 10 times earnings, they look much more attractive. The so-called "margin of safety" refers to buying stocks well below what you believe their actual value is -- that way, even if you're off a little bit, you've given yourself enough leeway that the purchase was still savvy.

Are you liquid?

It sounds obvious, but becoming an expert investor of any sort requires one non-negotiable prerequisite: capital. And not just a little bit of capital, but enough to hypothetically lose what you invest without it materially affecting your life. Before investing in the stock market, most experts suggest you have cash reserves equivalent to about six months of living expenses. No one can hope to master the art of buy-and-hold investing if they need to liquidate their portfolio a year later to pay their electric bill.

Be emotionally ready.

The stock market is a tumultuous place, and it requires serious emotional chops to stick it out over the long run without selling in a time of panic. In fact, the amount of discipline required to successfully practice the buy-and-hold strategy may be the single most difficult thing about it. Some are even of the opinion that great investors are born, not made. If that were the case, it would make sense that there are so few Buffetts in the world. Qualities like patience, confidence, valuation ability and contrarianism are rarely found together in a single person.

Don't waver unless your thesis changes.

If the biggest pitfall of the Buffett strategy is the reluctance to part with a stock, it's also the secret sauce that allows compound interest to work its magic. Selling your shares after a pullback is often precisely the wrong thing to do -- as long as your thesis is still intact. The only time you want to cut and run is when your thesis -- the reason you bought the stock in the first place -- starts to fall apart. If Buffett's thesis on Wal-Mart was that its ubiquity and scale offered customers convenience and prices other firms couldn't match, he should've sold when Amazon.com (AMZN) began to disprove that theory.

Teach others.

The best way to become an expert in anything is to teach others -- and that's as true with buy-and-hold investing as it is with cooking or math. Consider teaching your family the virtues of the practice. Perhaps you can start an investing club with your friends, launch a blog or self-publish a short book on the subject. Anything is possible in this day and age! It's no coincidence that Buffett, one of the great financial minds of history, shares mistakes, lessons and advice annually in both his letter to shareholders and his famous annual shareholders meeting in Omaha.

Repeat!

So you've completed steps 1-8. Phenomenal -- now do them again. The best investors never stop looking for opportunities, and the fact of the matter is there's always a killer stock pick out there just waiting to be discovered. Through discipline, curiosity, and a continued penchant for learning and self-improvement, a quality portfolio of dynamite, market-beating stocks can be built over time. Studying, looking for quality companies that check all the boxes, being emotionally grounded and teaching others will always help you become a better investor, regardless of where you find yourself in the market cycle.

John Divine is an investing reporter for U.S. News & World Report, where he covers financial markets and the economy, with a focus on individual stock analysis. He has been an investor himself for over 10 years, and has been writing professionally about stocks and investing for the last five years. He previously wrote about the stock market for The Motley Fool and InvestorPlace, and his work has appeared on Yahoo! Finance, MSN Money, and AOL DailyFinance. He graduated from Appalachian State University in 2011 with a bachelor's degree in finance and banking. At Appalachian, he was a member of the Bowden Investment Group, a team of students that ran a real-money portfolio worth over $100,000. You can follow him on Twitter or give him the Tip of the Century at jdivine@usnews.com.