Patience and Concentrated Stock Portfolio

Buffett advocates that investors hold a "concentrated stock portfolio". At any time you should own a very small number of stocks, say six at most, and you should know everything there is to know about these stocks. In total, in a lifetime of investing, you should buy and sell no more than twenty times.

Buffett says: "An investor should act as though he had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life." In a lifetime of investing this might result in, for example:
twenty stock purchases and no sales

Warren Buffett rightly extols the virtues of patience in investing - he says that he read annual reports from Anheuser-Busch Inc. for 25 years before buying their stock. He likens his patience in buying stocks to the patience of the baseball player who waits for the perfect pitch before swinging. We would caution beginning investors to bear in mind, however, that it takes a lot of practice before a baseball player consistently hits home runs from perfect pitches

Buffett Investment Method

Warren Buffett works with a list of companies whose stock he would like to own. He compiles his list by studying companies and their management teams in considerable detail. His favorite type of stock is of a company with a uniquely competitive market position. Often the competitiveness arises from the strength of a brand name, such as Coca-Cola or Gillette. He buys a stock if and only if its share price drops below its long-term value (intrinsic value). He is prepared to wait years for an opportunity to buy stocks at the right price.

Buffett calculates the price he is willing to pay for a stock by estimating its future earnings. He then uses this estimate to predict what the stock will be worth in the future. In order to accomplish this with reasonable accuracy, he demands the company can demonstrate more-or-less consistent earnings growth for at least five years - preferably longer. Buffett buys stocks when their prices are at low enough levels to offer him a high probability of significantly outperforming returns offered by government bonds.

If stocks he likes don't reach his target price, Warren does not buy - no matter how much he may like the look of them. He says that paying too much for a stock is a good way to guarantee a poor return. If stocks he likes become available at or below his target price, he buys big. Then he waits. This is the "classic" and best-known Buffett investment method. (He has several.) After he has bought a stock, his preferred holding time is "forever," although he concedes that it is sensible to sell a stock if it becomes grossly overvalued. Over time, his stock buying decisions have been amply rewarded