How does Warren Buffett pick his stocks?

Wall St. Nerd


Updated on

January 13, 2023


A step-by-step guide based on Warren Buffett's investment principles.

Warren Buffett, the billionaire entrepreneur and CEO of Berkshire Hathaway, is one of the most successful stock pickers and value investors of all time. Many investors try to emulate his success. But there is good news for you, you can learn Buffett's principles too and apply them to your own investment strategy.


The 7 basic principles

Here are the seven steps Warren Buffett uses to make his value stock picks:

  • Invest in what you understand
  • Learn the basics of value investing
  • Identify favourable stocks
  • Find companies that have proven their worth
  • Invest in good management
  • Trade aggressively in difficult times
  • Follow a long-term mindset

These steps will help you create your own portfolio.

Warren Buffett

First, you will get to know Warren Buffett as a person, and then we will go into detail about his investment principles.

Warren Buffett was born on 30 August 1930 in Omaha, Nebraska. Warren graduated from the University of Nebraska with a bachelor's degree in 1950. After reading the book "The Intelligent Investor" by Benjamin Graham, he was eager to study under Benjamin. In 1951, Warren successfully completed his master's degree at Columbia University in New York City.

After graduating from Columbia, Warren returned to Omaha and worked at his father's investment firm. During this time, Buffett and Graham developed a close relationship. Through this close bond between the two, Graham's offered him a job as an analyst at his firm in New York. Warren worked for the Graham-Newman Corporation from 1954 to 1956. These years were very educational for Warren and formed the basis for his later success.

At the age of 25, he returned to Omaha and founded his own investment partnership. The initial capital of USD 100,000 came from family and friends as well as his own savings. He ran the partnership from 1956 to 1969, and by the time the partnership was dissolved, Warren had increased the invested capital thirty-fold. In 1965, Warren bought the unprofitable textile company Berkshire Hathaway and turned it into one of the most successful investment companies in the world. Warren did this by slowly taking the "liquid assets" out of the textile business and investing them in good companies.

After the 1973/74 stock market crash, Warren had the opportunity to buy companies at bargain prices. Buffett went on a buying spree and made investments such as in the Washington Post. After the financial crisis in 2008, Mr. Market again offered companies at favourable prices, Buffett. Among others, he bought the US railway company Burlington Northern Santa Fe for USD 44 billion and the industrial group Precision Castparts for USD 37 billion. The rest is history that is not yet over.

Invest in what you understand

Before you invest in stocks, you should understand what the company does and how it makes money. That is why Warren Buffett avoided most technology stocks in the past, because he did not understand the business models. Therefore, he stuck with what he could understand best.

Although Berkshire Hathaway's stock portfolio and subsidiaries represent a heterogeneous mix of companies, one can notice a high concentration in industries such as insurance, banking, utilities and consumer goods. These are all companies that Buffett understands very well, so it makes sense that he is willing to put a lot of capital into them.

Learn the basics of value investing

Warren Buffett believes that most retail investors would rather buy cheap index funds than individual stocks. It is not that there is no money in evaluating and selecting stocks, but most people do not have the time, desire or knowledge to do it right.

If you are reading this, I am assuming you have the desire to invest, as well as the time to do some homework. However, before you can invest like Warren Buffett, you need a solid knowledge of value investing. Watching financial news and reading articles like this one is a good start, but I recommend you read a few books for any aspiring value investor:

With these two books, you will lay the foundation for your Buffett portfolio. With a sound knowledge of value investing concepts, you will be well-prepared to make good stock picks.

Identify favourable stocks

Once you have established your value investing criteria, your goal is to create a list of stocks that match your wish list. For example, let us say you want stocks that are less than 15 times earnings and have a strong financial history to generate 20% returns on assets year after year. Most online brokers offer search functions and other tools to simplify this process and create a list of stocks based on your criteria.

Find companies that have stood the test of time

Once you have a list of stocks whose ratios are attractive, you should narrow it down by choosing companies that do well in recessionary periods. Utilities are an excellent example, which is why Buffett likes to invest in them. Eliminate companies that rely heavily on a strong economy, such as retailers that sell luxury products.

You also need to look for companies that have a durable competitive advantage or a wide moat, as Buffett says. There are several things can give a company an advantage, such as efficiency, scalability or proprietary technology. A good example is Coca-Cola; it has an amazing distribution network as well as an extremely valuable brand name that gives it pricing power.

Invest in good management

It is hard to put a face on the value of good management. Warren Buffett will only invest in a stock if he trusts management and thinks they will continually act in the best interests of shareholders. Positive signs include a history of dividend growth and buybacks (both ways of returning capital to investors) and an excellent reputation.

Trade aggressively in difficult times

It is generally a bad idea to mimic the market. Long-term investors are likely to do well no matter when they buy.

However, it is important to look for good opportunities in tough economic times. I often tell people that one of the secrets of being a successful value investor is that they love market corrections because they offer the best buying opportunities.

Buffett invests money in good times and bad, but he did a great job by taking advantage of some buying opportunities during and shortly after the financial crisis, such as with the Bank of America deal.

Follow a long-term mindset

Regarding Berkshire Hathaway's equity portfolio, Buffett said that "his preferred holding period is for the long term". However, this does not necessarily mean that Berkshire will hold any of its stocks forever. In fact, Warren Buffett and his team sell shares regularly, and there are many good reasons for this.

What Warren Buffett is trying to say here is that he makes his investments with a long-term time horizon. In other words: If he cannot imagine holding the stock for years, he will not buy it at all. "If you're not willing to own a stock for 10 years, don't even think about holding it for 10 minutes," Buffett said. Buying shares because you think the company will have a good quarter or because a hot new product will be released, next year is just not Buffett's way.

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Hi, I'm Alexander Kelm.

Serial entrepreneur, value investor and angel investor. Founder of Wall St. Nerd. Join me here on to learn how to read financial statements, find healthy companies, and invest your money wisely.

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