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Warren Buffett's Secret to Profits

Written By Brian Hicks

Posted August 6, 2013

A net income of $4.54 billion – how would you like to say that was your investment profit?

Warren Buffett sure has made many investors envious. His company Berkshire Hathaway (NYSE: BRK-A) has seen a 46 percent increase in second quarter profit.

All of us could learn a thing or two from Buffett these days. He sure has made it big, and his strategy isn’t far-fetched at all.

warren buffettOne thing that sets Buffett apart is that he doesn’t see any promise in bonds. Instead, he sets his eye on stocks and whole companies. This strategy has clearly worked for him, and with bonds becoming increasingly unstable, it may be exactly what you should be doing with your portfolio.

Just recently, interest rates began to climb after the Fed indicated it may soon decrease its $85 billion-a-month bond purchases. As Bloomberg reports, insurers saw huge decreases in their portfolios, which often are heavy on fixed-income securities.

But that doesn’t mean anything to Buffett’s Berkshire because its stocks are worth way more than bond holdings. In 2012, he told shareholders that bonds were the most dangerous assets because of the inflation risk.

It’s not a surprise that people are following Buffett’s lead in investing. Everyone wants a piece of the pie. Knowing what he’s investing in and why can be one way for you to start setting up your portfolio.

The housing market is on the upswing, so Buffett has invested in many businesses that are associated with it. Makes sense, right? He has included:

  • Acme Brick

  • Shaw Carpet

  • HomeServices of America

These businesses have been seeing great profits lately. Homes are selling quickly as interest rates remain low and people have more money because of the improving economy. They are likely to continue to see gains as well, as people rush to buy before housing prices and home loan rates get too high.

Buffett also favors companies with a “moat,” or something to protect against competition. Market Vectors Wide Moat ETF (NYSE: MOAT), inspired by Buffett’s approach, tracks stocks like these, as MarketWatch reports. Think about it: when there is a moat around a castle, it keeps intruders from entering. The moat stocks act in the same way. They have barriers around them to prevent entry, allowing to profit as much as possible.

Stocks are a big piece of Buffett’s portfolio pie. He chooses commercial and industrial stocks the most. In fact, he spent $4.64 billion this last quarter, and he sold $781 million.

Investing in companies is another huge moneymaker. Investments in already successful companies, such as HJ Heinz Co. (NYSE: HNZ), have helped Buffett compound the profits he’s been seeing with his other investments.

So what exactly is Buffett investing in besides the ketchup giant?

  • Coca-Cola Co. (NYSE: KO)

  • Wells Fargo & Co (NYSE: WFC)

  • American Express Co. (NYSE: AXP)

  • International Business Machines Corp (NYSE: IBM)

These took up roughly 60 percent of his company’s portfolio this past quarter, Bloomberg reports.

If there’s one thing for sure, it’s that Buffett is not afraid to share his success with others. He’s been quite open about his strategy and expectations, so others can benefit the same way he has – as long as they have the money, that is.

From Bloomberg:

“He just plays a different game,” Tom Lewandowski, an analyst at Edward Jones & Co., said in an interview. “He can take more risk in his investment portfolio” than other insurers, because Berkshire keeps a lot of cash on hand and has other sources of earnings.

Not all investors have the ability to invest the way Buffett does, but they can use his strategy in their own way. For example, you may not be able to invest in Coca-Cola Co., but you could invest in businesses that have to do with the housing market. If you’ve been investing in bonds, it may be time to diversify your portfolio with stocks, as Buffett advises.

The best way to use Buffett’s strategy is to take what works for you and leave the rest. Over time, you’ll come up with your own strategy, which may not be as popular Buffett’s or as lucrative, but it will be perfect for you.


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