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Buffett's 3 Stock Picking Secrets

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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. And 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 cheap, 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.

Buffett’s 3 Stock Picking Secrets

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 or Cherry.

Clearly, he’s a fan.

But, you have to do more than just like a product, to buy the stock.

Buffett has always been an avid researcher. He even used to order Annual Reports from companies when they were sent by mail, so that he can check their financials. He would have stacks of reports piled in his garage.

So, 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.

Continued . . .


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2) Buy Stocks on Sale

This sounds so simple, right?

For years, Buffett has been on the sidelines, waiting for a chance to buy stocks when they went on sale. But in March 2020, when the coronavirus pandemic hit and the S&P 500 plunged over 20% within just 3 weeks, Buffett did not buy.

Over the last 2 years, he was heavily criticized for not buying during that dip.

But now, nearly 3 years later, with stocks down double digits in 2022 and the S&P 500 again in a bear market, Buffett has been buying again.

Buffett believes in buying cheap, well-known companies with stellar earnings growth and solid free cash flows.

Buffett Finally Makes His Move

In 2022, Buffett stepped in with his biggest stock purchases in a decade, adding over $50 billion worth of Chevron and Occidental Petroleum to the Berkshire portfolio.

The energy companies fit the bill perfectly, as they have single digit P/E ratios, earnings are on the rise, and record free cash flows.

And he keeps diving in for more. He dollar-cost-averaged into the Occidental Petroleum position through Sep 2022. Then he paused. But as the shares fell again in 2023, he jumped in Mar 2023 to buy over $700 million more. He now owns 23.1% of the company.

Buying stocks on sale is the easiest way to invest like Buffett. Any investor can search for value stocks with the classic fundamentals like P/E, PEG or Price-to-Sales ratios.

If you had done so to start 2022, you would have seen buying opportunities in Chevron and Occidental Petroleum, like Buffett did.

It doesn’t get any easier than that.

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 cheap 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.

Buffet does it, and you can do it too.

Buffett’s Final Key Ingredient: Discipline

Buffett has one other 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.

Many investors, including Buffett, missed out on a buying opportunity in the 2020 coronavirus sell-off.

But even if you missed that buying opportunity, another one is always coming. Just look at the energy sector. It was red hot in 2021 and 2022, but in 2023, it’s one of the worst performing sectors.

The market volatility of 2023 has created value opportunities.

Are you ready?

Profiting from Buffett's Strategy in Today's Market

When you combine these keys to successful investing, you need one more critical factor: time.

The Oracle of Omaha revealed his wealth-building secret in plain English. As he puts it, "whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

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Good Investing,

Tracey Ryniec

Stock Strategist Tracey Ryniec is editor in charge of Insider Trader and Value Investor portfolios.

¹ 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.


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