Warren Buffett: How You Need to Be Investing in 2024

If you want the ability to build generational wealth and the financial freedom to retire early and leave the unending corporate rat race, you should be listening to Warren Buffett's most recent investing advice.

For the better part of the last year, legendary investor Warren Buffett has been eerily silent, not saying a single word publicly despite all the craziness that has ensued in the stock market and the economy. That is until now. Buffett recently published his famous Berkshire Hathaway annual letter. Buffett uses this letter as a platform to share what's on his mind on a wide range of topics.

But what really got my attention, and what you should be paying attention to, is Buffett's hidden message for how you should be investing in 2024. In this video, we're going to cover Buffett's advice for investors in 2024, Buffett's thoughts on how to prepare for a potential stock market crash, and how you can protect yourself financially regardless of what is happening in the economy. Let's get into it.

If you ask most value investors, they will tell you that reading Buffett's annual letter is even more valuable than getting an MBA. In this year's letter, Buffett provided essentially a checklist of what makes a great investment. The first item on that list is that a business has to have what is referred to in value investing as a "moat." Here's how Buffett described it: "Our goal at Berkshire is simple: we want to own either all or a portion of a business that enjoys good economics that are fundamental and enduring within capitalism."

Some businesses will flourish for a very long time, while others will prove to be sinkholes. It's harder than you think to predict which will be the winners and which will be the losers, and those who tell you that they know the answer are usually either self-delusional or snake oil salesmen.

The most important part of this concept are the words "fundamental" and "enduring." You see, as Warren Buffett-style investors, it's not just about finding businesses that have great profitability in economics right now; the money is made in identifying companies that have characteristics that make it so favorable that those economics are likely to persist decades into the future.

To demonstrate just how difficult of an endeavor this is, let's use Buffett's investment in Coca-Cola as an example. Decades before Buffett invested in Coca-Cola, it was a member of the now infamous Nifty Fifty stocks. During the 1960s and 70s, these stocks were advertised as the most safe stocks out there, businesses that were considered undisrupted and going to be around forever. The thinking was that any company on this list couldn't possibly go out of business, and thus any stock on this list was automatically a great investment.

Of course, this turned out not to be the case. Of the 50 names on that list, 21 of these companies aren't even publicly traded anymore. Additionally, many of the Nifty Fifty companies that are still around are just shells of their former selves. Investors in these Nifty Fifty stocks suffered as a result, demonstrating why Buffett focuses so much on businesses where the favorable economics are both fundamental and enduring.

Before we move on to the second item on Buffett's list, we've compiled an extended checklist of Warren Buffett's investment criteria that you can download for free by clicking the link down below in the description.

The second item on Buffett's list is that ideally, the business will have attractive future growth opportunities. Here's how Buffett described it: "At Berkshire, we particularly favor the rare enterprises that can deploy additional capital at high returns in the future. Owning only one of these companies and simply sitting tight can deliver wealth almost beyond measure. Even just such holdings can grant you sometimes a lifetime of leisure."

An example to demonstrate this concept would be the business Costco. For background, Costco is one of the largest retailers in the United States, and over the years, has developed an almost cult-like following among its customer base. This was one of only a handful of investments in the personal stock portfolio of Buffett's late business partner, Charlie Munger. Charlie was a longtime shareholder in Costco, and as you can tell by the stock chart here, he was handsomely rewarded.

A large reason for the stock's outperformance was the attractive growth opportunities in front of the business. You see, Costco started out as a small retailer in the western part of the United States. However, over time, the company expanded, opening more stores. Given the gargantuan size of the United States, this was a huge growth runway. Importantly, the new store openings generated very attractive returns on investment for Costco.

In essence, Costco became a compounding machine, using profits from existing stores to open new ones, then using those profits from those newly opened stores to open even more new locations. This created a virtuous cycle, and all Charlie had to do was sit on his hands and let the magic of compounding work.

The point around attractive future growth opportunities is an often overlooked aspect in investing. It's great to find a business that is generating a lot of cash now; it's even better if you can find a business that is generating a lot of cash and has the ability to use this cash to generate even larger amounts of cash well into the future.

The third item on Buffett's list is good management. Here it is in Buffett's own words: "We also hope these favored businesses are run by able and trustworthy managers, though that is a more difficult judgment to make." However, Buffett has had his share of disappointments. In 1863, Hugh McCulloch, the first controller of the United States, sent a letter to all national banks. His instructions included this warning: "Never deal with a rascal under the expectation that you can prevent him from cheating you." Many bankers who thought they could manage the rascal problem have learned the wisdom of Mr. McCulloch's advice, and I have as well.

People are not that easy to read; sincerity and empathy can be easily faked. That is as true now as it was in 1986. Previously, Buffett has said he evaluates a company's management using two yardsticks. The first is how well they run the business. In the eyes of Buffett, it is important to see how a manager has performed relative to the company's status and competitive position in its industry after he or she took on the leadership role.

Buffett said, "Look at what they have accomplished considering what the hand they were dealt when they took over the company compared to what was going on in the industry." On this point, let's use Buffett's largest holding, Apple, as an example. As of the making of this video, Buffett's holding company, Berkshire Hathaway, owns a whopping nearly $150 billion worth of Apple stock. Apple CEO is a man by the name of Tim Cook. Cook became CEO of Apple in 2011. In the company's fiscal year 2011, Apple did $108 billion in revenue and $26 billion in profit. In 2023, that had grown to $383 billion in revenue and $97 billion in profit—quite impressive growth.

Additionally, Apple has continued to widen its moat by introducing new versions of its smartphones and laptops, as well as introducing entirely new products such as AirPods and the Apple Watch. And as if that wasn't enough, Apple has grown its high-margin service revenue from under 4% of total company revenues in 2023 to almost 25% of revenues in the most recent quarter. Tim Cook and Apple is just one example that demonstrates the type of things you want to be looking for when evaluating the performance of a company's management team.

The second yardstick Buffett uses to evaluate management is seeing how they have allocated capital over time. Here's what that means: you see, most publicly traded companies that Buffett would invest in are at the point where they are highly profitable. Over time, these cash profits build up in a company's bank account. Eventually, the company has to decide what to do with all the cash that's sitting there in the company's balance sheet.

This topic of capital allocation is extremely important in determining the ultimate success of an investment. Buffett says it's important that management is allocating capital in a way that is in the best interest of shareholders—not in a way that enriches management. Oftentimes, executives at companies will allocate capital in a way that lines their own pockets at the expense of shareholders. This can include things such as overpaying for large acquisitions that grow the company, which the CEO can now say that since he is managing a larger company, he deserves a hefty pay raise.

Or it could take the form of repurchasing shares at inflated prices so management can hit its earnings per share target and get even larger bonuses. To recap this video so far: Buffett recommends investors look for companies with three things:

1. A fundamental and enduring competitive advantage, aka a moat. Think Coca-Cola and the durability of its brand.
2. A company with attractive future growth opportunities. Here, remember Costco in its early days with an entire country worth of new locations to open into and generate attractive returns.
3. Good management—Buffett evaluates a company's management based on its track record of accomplishments and its ability to allocate capital in the best interest of the long-term shareholders. Think of Tim Cook and his accomplishments as CEO of Apple.

So now that you understand these concepts, there is one more thing from Buffett's letter that investors need to know about in 2024. If you don't understand this one concept, it could result in bankruptcy and financial ruin. What I'm referring to is the concept of having the so-called fortress balance sheet.

Buffett has built Berkshire to withstand any economic or financial crisis. There are huge lessons here for us as individuals to apply to our own financial lives. Here's Buffett in his own words: "I believe Berkshire can handle financial disasters of a magnitude beyond any we've experienced. This ability is one we will not relinquish. Our goal is realistic; Berkshire's strength comes from its niagara of diverse earnings."

We also operate with minimal requirements for cash. Even if the country encounters a prolonged period of global economic weakness, fear, and near paralysis, your company also holds a cash and US Treasury bill position far in excess of what conventional wisdom deems necessary. Berkshire is built to last.

You may be asking yourself how these comments from Buffett apply to individual investors in the year of 2024. Believe it or not, there are incredibly important lessons that you can take away from these comments from Buffett and apply to your own personal financial situation. Here's what I mean: take the quote, "Berkshire's strength comes from its niagara of diverse earnings."

Berkshire's financial security comes in large part due to its wide-ranging earning streams. Berkshire has a massive stock portfolio, an insurance company, a railroad, an energy company, an ice cream restaurant chain, and even a furniture retailer. The list goes on and on, and you can apply the same lesson to your own financial life. Generate income from a job, income from investments, and who knows, maybe even build up a business venture on the side.

The options are up to you, but these diversified income streams can give you protection during difficult economic times. We also operate with minimal requirements for cash. For a business, it starts to get into trouble when it's not generating enough cash to cover its financial obligations every month or quarter. The same logic applies to personal finance; by minimizing your monthly financial obligations, such as your mortgage payment, your rent, or your car payment, you're giving yourself financial flexibility in the event you hit a rough patch financially.

Berkshire holds a cash position far in excess of what conventional wisdom deems necessary. Berkshire is built to last. At the end of 2023, Berkshire had over $160 billion in cash, cash equivalents, and short-term investments in US Treasury bills. Think of this as Berkshire's emergency fund—money that acts as almost an insurance policy if the business becomes temporarily unprofitable.

The same logic can apply to your personal finances. Carrying a large cash balance can help you avoid having to liquidate your investments at cheap prices in the event that there is an economic slowdown. Imagine a big recession hits, and God forbid, you lose your job. You don't want to be caught having to sell your stocks at super low prices to cover your living expenses while you find a new job.

It's advisable to have up to six months’ worth of living expenses in your emergency fund. Following these principles laid out by Warren Buffett can help you build your own fortress balance sheet. If you enjoy this video, it is obvious that you are interested in learning more about investing and financial freedom. With that being the case, make sure to also check out this other video from our channel because it will help you on your wealth-building journey.

I'll see you over there. Getting your first $100,000 saved and invested will transform your life in ways you cannot yet imagine. You're going to find out why in this video.