What Can We Learn From Warren Buffett?

By Larry Holmes

Warren Buffett is considered by many as the greatest investor alive and one of the greatest of all time. After all, he's the second richest person in the world, second only to Bill Gates.

So how does the "Sage of Omaha" invest and what can we learn from his activities? Morningstar has a very interesting article on the subject...

http://news.morningstar.com/doc/article/1,,144207,00.html

Here are some highlights...

Buffett's portfolio is concentrated in only 33 stock holdings and more than 90% is in the top ten names. So he doesn't believe in a lot of diversification. He thinks that diversification is just protection against ignorance.

His three largest equity holdings are Coca Cola (KO), American Express (AXP), and Proctor & Gamble (PG) -- all three are components of the Dow Jones Industrial Average. His most recent investments are in Home Deport (HD), Lexmark International (LXK) and Tyco International (TYC).

Morningstar says that Buffett thinks that "the best way to reduce risk is to focus on companies you know extremely well and companies that boast strong competitive positions. If their earnings or share prices happen to bounce around a lot in the short term, who cares?"

He continues to hold a lot of cash -- approaching $50 billion, which is over 30% of his portfolio. This is reflective of the fact in the current overpriced market environment he can't find investments that offer much value. And he will just sit in cash until he does.

Even though Buffett has the reputation of being a value investor, only 11% of his holdings are in what Morningstar considers value stocks. The majority of the names fall into the large-cap growth category. He doesn't sell stocks just because they get expensive. He sells them when he is no longer comfortable with the business a company is in.

His current portfolio is allocated in 30.4% cash, 16.0% bonds, 29.0% publicly traded stocks, and 24.7% private businesses.

Six years ago his allocation was 5.0% cash, 39.2% bonds, 51.2% public stocks, and 4.7% private businesses.

So, compared to six years ago, he's emphasizing cash and private investments and de-emphasizing stocks and bonds.

What can we learn from Warren Buffett's investments? Two points come to mind.

First of all, he comes from the school of thought that says to "put all your eggs in one basket and watch the basket." I have found that to be true with many very successful investors. They realize that too much diversification only leads to mediocre results.

Second, he's very, very patient and disciplined. He will just sit and do nothing until the right opportunity comes along. And then he will act aggressively. This is also a common characteristic of the greats. The legendary speculator, Jesse Livermore, once said, "It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!"

Focus, patience, discipline... that's how the great ones become successful.

(c) Larry Holmes

Larry Holmes invites you to visit http://www.smart-money-report.com/ Your common sense guide for financial and investment success.

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