Warren Buffett is one of the legends of stock investing.
We all know his story.
He started investing in stocks when he was just 11. By the time he was 29 years old, he was already a millionaire stock investor.
In his 60s, he became a billionaire stock investor.
Often, the biggest question people ask about Buffett is: how does he do it?
And: could I do it too?
Buffett has become rich by buying undervalued, or out of favor stocks, and holding them for years.
Sounds easy, right?
If it was, everyone would be able to do what Buffett has done.
However, Buffett does have some secrets that us mere mortal investors can deploy to help us pick great value stocks.
3 Secrets to Picking Great Value Stocks Like Buffett
1) Buy What You Know
Even investing legends have favorite products. Over the years, Berkshire Hathaway has collected a big roster of well-known companies including Dairy Queen, See’s Candy, and Burlington Northern railroad.
How many of these acquisitions were influenced by Buffett’s own preferences for the products?
In Berkshire’s stock portfolio, one of its longest owned stock positions is in Coca-Cola, which Buffett first began buying in 1988.
Is it a coincidence that Coke is one of Warren Buffett’s favorite drinks? Over the last decade, Buffett has disclosed in interviews to both Fortune and the Financial Times that he drinks 5 cans of coke a day, usually Diet Coke or Cherry Coke.
Clearly, he’s a fan.
But you have to do more than just liking a product, to buy the stock.
Buffett has always been an avid researcher and used to order the Annual Reports from companies, when they would send them to you in the mail, to check the financials. He used to have stacks of the reports piled in his garage.
What’s your favorite product or brand?
We often have our fingers on the pulse of everyday products and activities, or even of something that is used in our jobs, that might get overlooked by others.
It’s a great way to find value stocks.
2) Buy Stocks on Sale
This sounds so simple, right?
But not so fast.
With the stock market continuing to hit new all-time highs and everyone worried about valuation, it’s become more difficult, but not impossible, to find good quality companies that are “on sale.”
But Buffett still believes in buying undervalued, well-known companies with stellar earnings growth.
One of the most undervalued stocks he’s bought recently was AbbVie, the pharmaceutical giant and maker of Botox.
It was one of his few new additions to the Berkshire portfolio in 2020 and he got it massively undervalued, with a forward P/E of around 8 and a dividend yielding over 4%.
Buying stocks on sale is the easiest way to invest like Buffett. Any investor can search for value stocks by the classic fundamentals like P/E, PEG or Price-to-Sales ratios.
If you had done so in 2020, you would have seen some great value stocks, including AbbVie.
It doesn’t get any easier than that.
Continued . . .
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See Zacks' latest value recommendations >>
3) Learn to Pivot and Change Course
Remember when Berkshire Hathaway owned IBM?
Neither do I, but for 7 years, until 2018, Berkshire had a large position in the technology giant.
Originally bought in 2011, Berkshire spent $10.7 billion, buying at the average price of $170 per share, to take a significant stake in the company.
This was going to be Buffett’s big play into technology, an area he had famously avoided for decades.
But it never really worked out. In 2016, shares fell as low as $125.
Buffett decided to sell, and exit the position, notwithstanding one of his most famous pieces of advice, “our favorite holding period is forever.”
Buffett shrugged off the defeat in interviews saying the company never lived up to expectations so he was changing course.
What did he buy instead?
In 2016, Apple was undervalued with a forward P/E of around 10 and the Street was mostly ignoring it.
That investment has more than made up for the mistake of buying IBM and is now one of the key pillars of Berkshire Hathaway’s business.
You will make investing mistakes, but the secret is to know when to pivot.
Buffett does it, and you can do it too.
Buffett’s Final Key Ingredient: Discipline
Buffett has one skill as an investor that’s hard to come by: discipline.
He will wait, sometimes years, in order to buy a stock, or a company, at a low price.
His discipline paid off in the 2008-2009 financial crisis when he was able to step in and offer financial assistance to struggling banks, offering a $5 billion bailout to Goldman Sachs, for instance, when others were on sinking ships.
He had what his mentor Benjamin Graham, famously called, a “margin of safety.”
This can be achieved by being prepared for pullbacks, corrections or even bear markets.
Last year, the coronavirus sell-off, and the months after it, were the perfect buying opportunity for value investors to buy their favorite companies at undervalued prices.
But even if you missed that buying opportunity, another one is always coming.
Buffett has billions in cash sitting in Berkshire’s coffers, just waiting for another chance to buy.
What will you do when deals come around again?
Will you be ready?
How to Make Money on Buffett's Success
Buffett is arguably the greatest value investor of his generation.
His essential secret? As he puts it, "whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.”
I feel the same way, and that's what drives a portfolio I'm managing called Zacks Value Investor.
We look for stocks priced at "discounts" of 25%, 50%, and more. Our strategy combines value metrics with Zacks Rank timeliness to catch these hidden gems just as Wall Street begins to recognize their true worth.
You see, it's not enough to simply find stocks that are undervalued. We want to buy them as they begin their upswings, and then ride them for months or years until they reach their full growth potential.
That's why stocks in the portfolio have climbed as high as +213.2%, +290.3% and even +392.0%.¹ In fact, 6 current positions have soared to triple-digits.
Now would you like to look inside the portfolio and see the value stocks it recommends today?
You're welcome to do so, and as an added bonus, you can also download 5 Stocks Set to Double free. This Special Report reveals 5 stocks our team of experts predict will double within the next 12 months.
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Tracey Ryniec, as Zacks Value Stock Strategist, directs our Value Investor portfolio.
¹ As of 8/23/21. The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.