How to Invest Like Warren Buffett

 

“There are thousands of flaky articles and videos online about the latest "Warren Buffett stock," and more than one fund has tried to replicate Buffett's investing style with gimmicks he'd never endorse.

 

No wonder: By the time he retires next week, the Oracle of Omaha will have turned a $10,000 investment in Berkshire Hathaway into $600 million. Who wouldn't want a bit of that magic?

 

The Wall Street Journal's Jason Zweig explained why "there will never be another Warren Buffett," but a recent analysis of his career shows how mere mortals could mimic Berkshire's portfolio.

 

It certainly isn't the first attempt to capture Buffett's essence: From the much-cited academic paper "Buffett's Alpha" to Robert Hagstrom's excellent "The Warren Buffett Way," they range from the number-heavy to the anecdotal. Kai Wu of Sparkline Capital, a quantitative investor himself, threads the needle by doing the math for us. He explains how Buffett did it and we might, too.

 

The first thing to understand is that there were three eras behind that 6 million percent return as Buffett's thinking evolved: the industrial age, the consumer age and the information age. That's reflected in what Buffett bought, and also said, over the years.

 

"Ultimately, business experience, direct and vicarious, produced my present strong preference for businesses that possess large amounts of enduring Goodwill [1] and that utilize a minimum of tangible assets [2]," he wrote in 1983.

 

Buffett shifted attention from companies like Geico to brands like Coca-Cola.

 

As he was willing to pay ever higher multiples of book value, Buffett opined in 2018 that we were in "an asset-light economy." He was then riding his most successful investment ever in Apple.

 

Wu deconstructs Buffett's sources of return with an important nod to leverage: Berkshire has made use of insurance "float" to effectively boost its overall gain. Don't try that yourself.

 

Even without that, he calculates that Berkshire's publicly traded stock portfolio has beaten the market by 3 percentage points a year since 1978 -- a significant edge. The explanation is investing factors. Of six that drive returns, Buffett has had positive exposure to value (no surprise), but also quality and intangible value.

 

Buffett's exposure to momentum has been negative -- he doesn't chase hot stocks. Ditto for size. Berkshire is too big now to play in small-caps.

 

Only 0.4 percentage point has been Buffett's alpha -- his investing skill.

 

You can't bottle that, but Wu says a simple two-factor model of intangible value and quality would have captured the magic. He replicated it by selecting the top 20% of stocks having those factors. Some low-cost ETFs do something similar.

 

Even better, look abroad or to smaller companies for superior value, which has been hard for Berkshire to do.

 

Imagine having an advantage over the greatest investor of all time.” [5]

 

1. In accounting, goodwill is an intangible asset representing the premium paid when one company buys another, exceeding the fair value of its net identifiable assets (assets minus liabilities).

 

It captures the value of non-physical elements like a strong brand, loyal customer base, good reputation, talented employees, or proprietary technology that make the acquired business worth more than just its physical parts. Goodwill appears on the buyer's balance sheet as a long-term asset and is only recognized after an acquisition, not internally generated.

 

 

Key Characteristics

 

    Intangible: It's not physical (can't be touched or seen).

    Acquisition-Related: Only recorded when one business buys another.

    Premium Paid: The excess purchase price over the net fair value of assets.

 

What it Includes (Examples)

 

    Brand recognition and name

    Customer loyalty and relationships

    Skilled workforce and management

    Proprietary technology, trade secrets, patents

    Market share and strategic positioning

 

Accounting Treatment

 

    Balance Sheet: Listed under long-term or noncurrent intangible assets.

    No Amortization (Usually): Under US GAAP, it's not amortized (spread out) but tested annually for impairment.

    Impairment: If the acquired business underperforms, the goodwill's value can be reduced (written down), impacting earnings.

 

2. In accounting, tangible assets are physical items a company owns that have value and can be touched, like buildings, machinery, vehicles, inventory, and furniture, recorded on the balance sheet as current (short-term like inventory) or non-current/fixed (long-term like equipment) assets, used to generate revenue over time, unlike non-physical intangible assets (patents, trademarks).

 

Key Characteristics

 

    Physical Substance: They have a concrete form you can see, feel, or touch.

 

Value: They hold monetary value for the business.

Types: Can be current (e.g., inventory, cash) or long-term fixed assets (e.g., land, buildings, equipment).

Depreciation: Long-term tangible assets lose value over time through depreciation, except for land.

 

Liquidity: Vary in how easily they convert to cash; inventory is liquid, while a factory is not.

 

Examples

 

    Property, Plant, & Equipment (PP&E): Land, factories, machinery, delivery trucks, computers.

    Inventory: Raw materials, work-in-progress, finished goods.

    Office Furniture & Fixtures .

 

Importance in Accounting

 

    Balance Sheet: Appear under current or non-current (long-term) asset sections.

 

Collateral: Can secure loans due to their real-world value.

Valuation: Their value is assessed through appraisals, unlike easily valued stocks.

Operational Use: Essential for daily operations, producing goods, or providing services.

 

3. In accounting, a company's quality refers to the reliability, sustainability, and accuracy of its reported earnings and financial health, going beyond just the bottom line to reveal how much profit comes from core operations versus one-off events or aggressive accounting.

 

 It's assessed through a Quality of Earnings (QoE) analysis [4] that digs into financial details to find true, repeatable performance, crucial for investors, lenders, and M&A deals to gauge future stability and value.

 

Key Aspects of Accounting Quality

 

    Sustainability: Are earnings consistent and likely to continue, or inflated by temporary gains?

    Accuracy & Transparency: Do financial statements truly reflect economic reality, or are they manipulated by accounting choices?

 

    Relevance: Is the information useful for decision-making, highlighting core business performance?

   

Reliability: Can stakeholders trust the reported figures?

 

What a Quality of Earnings (QoE) Analysis Reveals

A QoE analysis by a third party examines deeper financial data (like general ledgers, tax returns, contracts) to:

 

    Adjust for Non-Recurring Items: Remove one-time profits (asset sales) or expenses (restructuring).

    Identify Distortions: Find aggressive revenue recognition or unusual discretionary spending.

    Uncover Risks: Reveal over-reliance on a few clients or declining sales trends.

    Provide a Normalized View: Present a clearer picture of the company's true earning power, as explained by The Bonadio Group.

 

Why It Matters

 

    Investors & Buyers: Decide if reported profits are real and worth the price, especially in acquisitions.

    Lenders: Assess the true ability to repay debt.

    Management: Understand internal financial health and risks.

 

In essence, high accounting quality means earnings are trustworthy, sustainable, and driven by strong, ongoing business operations, not accounting tricks.

 

4. Quality of Earnings (QoE) analysis (in more details) is a deep dive into a company's financials, performed by an independent expert, to assess if reported earnings are sustainable, accurate, and repeatable, going beyond standard audits by normalizing for one-time events (like asset sales) and accounting policy differences to reveal true economic profitability, crucial for M&A, lending, and investment decisions. It normalizes earnings, often focusing on adjusted EBITDA, to show underlying operational health, identifying risks and opportunities for better valuation and decision-making.

 

Key Components & Purpose

 

    Sustainability Assessment: Determines if current earnings are likely to continue, focusing on the core business.

    Earnings Normalization: Adjusts reported net income by removing non-recurring items (e.g., restructuring costs, unusual gains/losses) and one-off events, revealing true economic earnings.

    Focus on Adjusted EBITDA: Uses Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) as a key metric, stripping out financing/tax effects to show cash-generating ability.

    Deep Dive: Reviews detailed financial statements, bank records, and operational data, not just summary reports.

    Risk Identification: Uncovers hidden risks, aggressive accounting, or unsustainable revenue streams.

 

Why It's Used

 

    Mergers & Acquisitions (M&A): Essential due diligence for buyers to understand the target's real value and performance before a deal.

    Lending & Investment: Helps lenders and investors assess creditworthiness and future prospects, informing loan terms or investment size.

    Valuation: Provides a more reliable basis for valuing a business by focusing on recurring economic earnings.

 

QoE vs. Audit

 

    Audit: Provides general assurance that financials comply with GAAP (Generally Accepted Accounting Principles).

 

    QoE: Assesses the quality and predictability of those earnings, focusing on the economic reality behind the numbers, often using "agreed-upon procedures" rather than an audit opinion.

 

5. How to Invest Like Warren Buffett. Jakab, Spencer.  Wall Street Journal, Eastern edition; New York, N.Y.. 26 Dec 2025: B10.