Warren Buffett: How to Make Money Investing in 2024

Warren Buffett's late business partner and friend Charlie Munger used to have a saying about investing: It's not supposed to be easy. Anyone that thinks it's easy isn't paying attention. This saying is more true now in 2024 than ever before. Today's stock market is treacherous, to put it mildly. The stock market has soared in price, with both the S&P 500 and the NASDAQ ripping to all-time highs as of the making of this video. Based on the high prices in the stock market, you would think that everything is perfect in the economy; however, this could not be further from the truth.

Inflation and interest rates remain stubbornly high. Companies are announcing mass layoffs. The majority of Americans are barely getting by financially, as demonstrated by a staggering 66% of Americans living paycheck to paycheck. Investing is never easy, especially now. So how can you invest successfully given all the challenges facing the stock market and the economy? Fortunately for us, legendary investor Warren Buffett recently laid out the secret of how people should be investing in 2024.

Earlier this year, Buffett published his closely followed Berkshire Hathaway annual letter. He uses this letter as a way 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 right now with all the craziness in the stock market.

So 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 to protect yourself financially regardless of what happens in the economy. Let's get into it.

In this year's letter, Buffett provided essentially a checklist of what he looks for in a potential investment in the year 2024. The first item on that list is that the business has to have what is referred to as a "moat." Here's how Buffett described it in the letter: "Our goal at Berkshire is simple. We want to own either all or a portion of businesses that enjoy good economic characteristics 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 would think to predict which will be the winners and losers, and those who tell you that they know the answer are usually either self-delusional or snake oil salesmen."

The most important words in this paragraph are "fundamental" and "enduring." One of the biggest mistakes investors make is thinking that just because a company is growing rapidly and incredibly profitable right now, that those favorable characteristics will continue indefinitely into the future. However, this often turns out to not be the case. A perfect example of this is the car company General Motors.

In the year 1998, General Motors was number one on the coveted Fortune 500 list. The company was one of the most profitable businesses in the world. However, things changed, and they did so relatively quickly. Just over a decade later, GM was forced to file for bankruptcy and even had to get bailed out by the US government to the tune of billions of dollars. This is why identifying a business with a moat is so important. The durable competitive advantage helps the business be profitable not just now, but potentially well into the future.

Contrast what happened with General Motors to the performance of American Express, one of the largest positions in the stock portfolio Buffett manages on behalf of Berkshire Hathaway. American Express is a credit card and payments company. The business has built a loyal following among consumers, and its cards have become somewhat of a status symbol of wealth. American Express has over 100 million cardholders globally. As a result, merchants are pressured to accept American Express cards at their business, despite the fact that American Express charges higher than average fees to merchants. Merchants that try to push back on American Express's high fees risk losing millions of affluent customers. This is an incredibly powerful moat and is shown in American Express's financial performance.

Buffett first invested in the company in 1991. At that time, American Express had $14 billion in annual revenue and generated $749 million in profit that year. Those numbers have since grown to $56 billion in revenue and $8.3 billion in profit in 2023. This is the power of a strong moat. Now you can see why American Express is one of Buffett's most successful investments of all time.

The next item on Buffett's checklist is that ideally, the business will have attractive future growth opportunities. Here's how he described it: "At Berkshire, we particularly favor the rare enterprise that can deploy capital at high returns in the future. Owning only one of these companies and simply sitting tight can deliver wealth almost beyond measure. Even heirs to such a holding can sometimes live a lifetime of leisure."

An example of this concept of future growth opportunities is Buffett's investment in Coca-Cola. Buffett's first investment in Coca-Cola was all the way back in 1988. Buffett ended up acquiring a whopping 6.3% of the entire company. Buffett's Coca-Cola position accounted for a staggering 40% of his entire stock portfolio at Berkshire at the time. Buffett was criticized for making such a large bet on a company that appeared to not have much in the way of attractive growth opportunities in its future.

I mean, after all, Coca-Cola had been on the shelves of grocery stores throughout the United States for roughly 100 years at that point. However, Buffett realized that Coca-Cola had massive growth opportunities outside the United States. Coca-Cola's relatively low price per beverage meant that its drinks could be enjoyed by people in even low-income countries. Buffett's insight turned out to be true. In the year 2023, approximately 75% of Coca-Cola sales by volume come from markets outside the United States. This was a big reason why Coca-Cola was able to grow its annual profit from $1.4 billion in 1988 all the way to $11.3 billion in 2023. Buffett's approximately $1 billion investment in Coca-Cola has grown to be worth nearly $40 billion between stock appreciation and dividends.

As a quick side note, Warren Buffett's letters to shareholders are frequently referred to as one of the best ways to learn about investing and business. To thank you guys for watching this video, I have compiled over 40 years' worth of Buffett's letters that you can download completely for free. Just check out the link in the description of this video to grab your copy because these letters had a big impact on me, and I know they will do the same for you.

Now let's get back into the video. The third item on Buffett's checklist is good management. Here's what he had to say: "We also hope these favored businesses are run by able and trustworthy managers, though that is a more difficult judgment to make. However, Berkshire has had a share of disappointments. In 1863, Hugh McCulloch, the first Comptroller 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 had learned the wisdom of Mr. McCulloch's advice, and I have as well. People are not that easy to read. Sincerity and empathy can easily be faked. That is as true now as it was in 1863."

Now this raises the question: What exactly makes one company's management good and another one bad? In prior interviews, Buffett has said that he judges the management of a company on two criteria. The first is how well they have run the business relative to other companies in the same industry. To demonstrate this point, let's use Apple, Buffett's largest position in his stock portfolio, and its CEO Tim Cook.

Tim Cook took over as CEO of Apple in 2011 after previously being the company's Chief Operating Officer. In the company's fiscal year 2011, Apple had $108 billion in revenue and generated $26 billion in profit. Well, by the year 2023, the company had grown significantly. Apple did $383 billion in revenue and generated $97 billion in profit in 2023. Additionally, the company made some very important strategic decisions that turned out to be big wins. This included releasing new products such as the Apple Watch and AirPods. Additionally, Cook focused on growing Apple's high-margin services business. Revenue from services grew from under 4% of total company revenue in 2013 to almost 25% of revenue as of the making of this video.

These accomplishments are even more impressive when you consider how Apple's competitors fared during the same time period. Nokia was one of Apple's biggest competitors in the smartphone market. As we can see here, Nokia's sales peaked at €51 billion in 2007. By 2013, that number had fallen all the way to €12.7 billion as Nokia rapidly lost market share to Apple's iPhone. Nokia's struggles make the accomplishments of Tim Cook at Apple all the more impressive.

The second criteria by which Warren Buffett evaluates a company's management is how well they have allocated capital. The term "allocating capital" may sound intimidating and highly technical; however, it's actually pretty simple. The goal of any company is to obviously make money over time. If that company is successful in accomplishing that goal, those cash profits should start to accumulate in the company's bank account. What a company's management does with all that cash matters a lot.

There are two main things that a company's management can do with that cash. The first is that they can reinvest it in the business. This takes two forms. The first is what is known as organic growth. These are things like opening a new plant to be able to produce more goods or spending money on research and development to introduce new products. The second option for management is to return that money to shareholders. This can be done either through dividends, which are cash payments to holders of the stock, or share buybacks. Buybacks are where a company takes its own cash and purchases its own shares. Now this reduces the number of shares outstanding of a company and makes each remaining share represent a larger percentage ownership stake in the company.

The issue of capital allocation is crucial for the success of any investment. According to Warren Buffett, it's essential for managers to allocate capital in ways that benefit shareholders rather than enriching themselves. Frequently, company executives might allocate funds to benefit their own interests at the shareholder's expense. This can involve overpaying for a large acquisition to expand the company, allowing the CEO to justify a significant pay raise, or alternatively, it might involve repurchasing shares at inflated prices to meet earnings per share targets and secure substantial bonuses for management.

So now we know what Warren Buffett's criteria are for a good investment in the year 2024. First, Buffett is looking for companies with durable competitive advantages, AKA moat. This will help the company maintain its success well into the future. Second, Buffett is looking for companies that also have attractive future growth opportunities. Think of Coca-Cola and its ability to expand internationally. Finally, Buffett wants a company that is run by competent management.

So now that we understand what Buffett looks for in a potential investment, there is one thing from Buffett's letter that investors need to know in 2024. If you don't understand this one concept, it could result in significant financial pain. What I'm referring to is being built to last financially. Here's how Buffett explained this concept: "I believe Berkshire can handle financial disasters of a magnitude beyond any heretofore 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 U.S. Treasury bill position far in excess of what conventional wisdom deems necessary. Berkshire is built to last."

Warren Buffett built his company, Berkshire Hathaway, in a way that it could not only withstand economic shocks but actually benefit from them. We, as individual investors, can apply the same lesson to our own personal finances. This advice is especially helpful right now given all the uncertainty in the stock market and economy.

So what exactly does following Buffett's advice look like for us as individual investors? Well, there are three main things you can begin doing today to make yourself built to last financially. The first is to have diverse earnings. Berkshire Hathaway is a holding company that owns a variety of different businesses in various industries. As of the making of this video, Berkshire owns a whopping 73 different businesses in their entirety. These businesses include everything from insurance companies, a major U.S. railroad, as well as dozens of companies in the manufacturing, service, and retailing industries.

The concept of having diverse earning streams can be applied to someone's personal financial situation as well. Someone can build up multiple sources of income through things such as having a job, a side business, a small real estate portfolio, and even an income-producing stock portfolio. Having diverse income streams helps cushion you in the event you were to lose your main source of income, which for most people is their job.

The second thing you can do to protect yourself financially, following Buffett's principles, is to have minimal requirements for cash. As of the making of this video, Berkshire Hathaway has a market cap that is approaching $1 trillion. Yes, that is trillion with a "T." Despite being one of the largest companies in the world, Berkshire has relatively little debt. This makes it so that if Berkshire were to ever hit a rough patch financially, it doesn't have to worry about having to pay large debt payments. The same logic can be applied to individuals. By reducing your monthly payments on things such as your housing expense, car, and credit card bills, you make yourself prepared to be able to withstand any potential economic shocks.

Finally, the third lesson from Buffett is to always keep a sizable amount of cash on hand to take advantage of big financial opportunities that may come your way. As you can see here, Berkshire Hathaway has nearly $200 billion in cash and cash equivalents ready to be deployed if the right opportunity presents itself. Due to the high prices in the stock market, Buffett has been eerily quiet when it comes to buying stock. Instead, he's used the last few years to stockpile cash. This has many longtime followers of Buffett worried that he likely thinks the stock market is incredibly overvalued. The last time Buffett built up this much cash in his portfolio, the U.S. stock market went on to crash by a staggering 50%.

If you want to see why Buffett has been stockpiling cash and what he thinks is in store for the stock market, you can check out this video here. Make sure to give the video a watch because Buffett shares the secret of how to invest best when the stock market is potentially overvalued. I will see you over there.