Use These 3 Warren Buffett Principles to Supercharge Your Investment Returns in 2023

When assembling a list of the greatest investors of all time, Warren Buffett, the CEO of Berkshire Hathaway, easily makes the list. While most know his value-focused market strategy, the principles he abides by can be helpful for all kinds of investors.

So while you might consider yourself a growth investor or income investor, here are three principles that can help improve your returns in 2023 and beyond, regardless of what camp you fall into.

1. Don’t be afraid to go against the grain

When market panic (or euphoria) sets in, it’s easy to follow the crowd. However, Buffett thinks that is a mistake. Buffett has said investors should “be fearful when others are greedy and greedy when others are fearful.” While the market was fearful for much of 2022, it has seen quite a bit of optimism in 2023.

Investors need to understand current market sentiment before making any decisions. Now may not be the best time to establish new positions if optimism is driving stocks too high, too quickly. On the flip side, many stocks that had an atrocious 2022 haven’t recovered.

One that comes to mind is cybersecurity company CrowdStrike, a rapidly growing business that produces loads of free cash flow and is down 62% from its all-time high as of this writing. Many investors got burned by overvalued software stocks in 2022 and are fearful of getting back in. Use that to your advantage for CrowdStrike (up only 5% year to date) and other companies like it.

2. Own a stock, don’t trade it

Buffett believes that investors should be focused on the long term. He once said, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.” Now that doesn’t mean buy it and forget about it. If something changes, you need to be willing to move on. But when first assessing if a stock is worth buying, you should ask yourself if the company will be worth owning for a decade.

This is easier said than done, because it’s impossible to look 10 years into the future. Still, investors should consider the market opportunity, competition, and other factors that could disrupt the business. This looks different for stocks in different sectors. For example, in the pharmaceutical space, investors should know about drugs in a company’s pipeline and ones that have expiring patents. For tech, it might be when a company breaks even and how much it needs to grow for its current valuation to make sense.

Time is an advantage many individual investors have — use it to your advantage.

3. Valuation is important, but not everything

When you’ve finally pinpointed a stock that meets your requirements, then it’s time to look at valuation. While Buffett is a stickler for using earnings as a measuring stick, that doesn’t always work if you’re a growth investor.

Multiple metrics, like price-to-earnings, price-to-sales, or price-to-free-cash-flow can be used to assess a stock’s valuation. But Buffett believes this can’t be the only factor, as another one of his quotes says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Because the best companies will rarely look cheap. One that comes to mind is Costco, the members-only bulk warehouse club. Costco has traditionally commanded a premium compared to its peers in the retail space, thanks to its steady track record of first-rate execution.

Data by YCharts.

Now, if its current valuation is too high is another question entirely, but sometimes you have to pay up to own a best-in-class company.

If you keep these three investment principles in mind in 2023, you can position yourself for success in the stock market. However, you need to judge your performance not just on one year, because the goal is to own stocks for the long term. Buffett has made his name through buying and holding stocks, but if you zoom in on just a single year of his returns, you may not think the same way.

Buffett has been generous enough to pass on much of his wisdom to investors, but you have to be disciplined and patient enough to follow it.

Keithen Drury has positions in Costco Wholesale and CrowdStrike. The Motley Fool has positions in and recommends Berkshire Hathaway, Costco Wholesale, and CrowdStrike. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.