Investing like Warren Buffett

Warren Buffett is arguably the greatest investor of all time.

He has a great track record of creating and maintaining his wealth through share investments, but many of his principles also apply to property investors.

So let’s look at some of Buffett’s investment principles and see how we can apply them to our property investing.

1. Adhere to a proven strategy                                                                                                        

Buffett’s success has often been put down to his extraordinary patience and discipline, never deviating from his proven investment strategy even when faced with short term changes in the market.

This is a great lesson for property investors, as most don’t have a plan or adhere to a proven strategy.

If you don’t have an investment strategy to keep you focused, how can you hope to develop financial independence?

It’s too easy to get distracted by all the “opportunities” that keep cropping up. Unfortunately many of these supposed opportunities don’t work out as expected.

Look at many of the investors who bought off the plan or in the next “mining town hot spot”, only to see the value of their properties underperform.

Over the last few years as our property markets have turned the corner there’s a whole new

generation of property “gurus” offering to tell you what to do with your money and what the next big opportunities will be.

And yes…I know some of these “opportunities” sound attractive, but I see some major pitfalls in some of them – I’ll explain more about what you could do in a moment.

2. Invest counter cyclically

Buffett is a renowned counter cyclical investor, advising:

“We attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

This is also the investment strategy of many successful property investors and has proven to be a winning formula for many who invested in property a few years ago when many predicted that property prices would fall further.

Some of our property markets turned a few years ago and some property investors have already made very significant profits over the last 24 months.

3. Sometimes it’s best to do nothing

A great quote from Warren Buffett is…

“The trick is, when there is nothing to do – do nothing.”

Yet many investors get itchy feet and want to do more, put another deal together or buy another property.

There are stages in the property cycle and times in your investment journey when it is best to sit back and wait for the right opportunities because wealth is the transfer of money from the impatient to the patient.

By the way…

I do not think this is the time in the cycle to do nothing.

There are still some great opportunities for those who know where to look for them.

Let me clarify that – there are definitely some places where you “should do nothing”.

There are clearly some markets you should avoid.

4. Specialize – don’t diversify

Buffett has adopted a focused investment philosophy investing the bulk of his funds in a few companies.

However, most advisers suggest diversifying. 

This is really just playing the game of investment not to lose, rather than playing the game to win and leads to average results.

On the other hand, successful investors specialize.

They become an expert in one area or niche and reproduce the same thing over and over again getting great results.

I know this has worked well for me – for years I have invested in a particular type of property and it has grown my wealth.

5. Invest for value

Buffett is a value investor who says…

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

And it’s the same with property.

You make your money when you buy your property but not by buying a bargain.

You lock in your profits by buying the “right property” – one that will outperform the averages in the long term because of its scarcity or the potential to add value.

It seems very clear that the next stage of the property cycle will be very different with subdued growth and some properties not increasing in value at all.

What worked for many over the last few property cycles just won’t work in today’s economic conditions … the easy ride is over (for those who don’t adjust).

Remember, the price you pay for a property isn’t the same as the value you get.

Successful investors know the difference.

6. Invest for the long term

Buffett admits he can’t predict which way the markets will move in the short term and he is quite certain no one else can either.

So instead, he takes a long-term view of the market saying if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.

Similarly those who have created wealth out of property took a long-term view.

This doesn’t mean buy and forget – you should regularly review your property portfolio.

When was the last time you checked to make sure you were getting the best rents or that your mortgage was appropriate for the current times?

Maybe it’s time to refinance against your increased equity and use the funds to buy further properties?

And sometimes it is appropriate to consider selling an underperforming property to enable you to buy a better investment.

7. Don’t invest in anything you don’t understand

During the boom years investors’ hungered for returns that took them into exotic terrain, whether they realised it or not.

Promoters often promised large profits using opaque schemes, and the same is starting to happen again as the new property cycle rolls on.

Warren Buffett never invests in anything he doesn’t understand – nor should you.

8. Manage your risks

Many investors don’t fully understand the risks associated with property investment and therefore don’t manage them correctly.

One common error is not having sufficient financial buffers to see them through from one property cycle to the next.

Smart investors have financial buffers in their lines of credit or offset account to not only cover their negative gearing but to see them through the down times like we experienced in the last few years.

They don’t only buy properties; they buy themselves time.

Another way smart investors minimise risk is to buy their properties in the correct ownership structures to legally minimise their tax and protect their assets.