How to Become a Mini-Warren Buffett With Value Stocks

Do you want to become a “mini Warren Buffett” owning a stock portfolio that consistently rewards you over time?

If so, value stocks are worth checking out. Value stocks are those that compare favorably to the underlying company’s earnings, net worth, and cash flows. Studies have shown that value stocks tend to outperform growth stocks over the long term.

Warren Buffett made his own money in the early years by buying the “cheapest of the cheap” value stocks. Today he is more willing to pay a higher price for great companies, but the core principle of his philosophy remains: pay less than what you get.

In this article, I’ll explore how to find stocks that cost less than they’re worth and give you a shot at Warren Buffett-style investment results.

Research extensively

The first step to finding real value stocks is thorough research. In the introduction to this article, I said that value stocks are cheap relative to their assets, earnings, and cash flows. That’s true, but what if the company’s earnings trend down? If that’s the case, then the apparent “equity” can be a mirage. Finding stocks that are both cheap and growing is quite difficult. You can start by taking inspiration from Warren Buffett’s own portfolio, created with cheapness in mind.

For example, one stock Buffett has owned in the past is Suncor Energy (TSX:SU)(NYSE:SU). This stock is pretty cheap today, trading at just 6.4 times earnings. Buffett probably thought that apparent cheapness was a virtue when he started buying SU in 2018 when it was trading for over $40 (over CA$50). However, Buffett sold all of his Suncor Energy stock later in 2021 when it was around $25.

Buffett’s overall track record is good, but there’s never a guarantee that any stock he owns will be a winner. If you go all-in on a Buffett stock, you can easily lose money. That might sound like a bleak prospect, but luckily Buffett has a recommendation that can help.

Consider index funds

Investing like Warren Buffett isn’t easy, but Buffett himself has a recommendation that’s actually pretty easy to implement: Hold index funds.

Index funds are passive funds with low management fees that hold huge portfolios of stocks. They are based on stock indices such as the TSX 60 index, which tracks the 60 largest companies in Canada. You can invest in the entire TSX 60 by holding iShares S&P/TSX 60 Index Fund (TSX:XIU).

XIU is a fund that holds the TSX 60 and gives you an extremely diversified portfolio from the start (diversification means managing risk by holding many stocks instead of one). The management fee is only 0.16% per year, which is pretty low. Finally, the fund pays a dividend yield of 2.5%, allowing you to earn a small cash flow even in bear markets. It’s a pretty sensible investment for many people, and Warren Buffett thinks most people should invest in funds like this.

Aim for the long term

One final step on your journey to becoming a mini Warren Buffett is to take a long-term view of your investments. Once you have a diversified index fund portfolio, there is little need to trade actively. Instead, you can just do as Buffett did and hold the asset for decades. This strategy can sometimes result in heavy losses for a single stock, but it often works for diversified index funds.