How to Make Money The Buffett Way

What if the bottom was falling out of the stock market, and your portfolio had plunged by 10 percent in a week?

And what if one stock, in particular, had seemed like a sure bet when you bought it last month. The company sells something everyone needs, is well managed, and has a consistent track record of growth—that is, until it missed Wall Street earnings expectations by a penny and got pounded down by 15 percent in a single day.

Would you:

a) Sell it and curse yourself for buying it in the first place?

b) Sit tight and do nothing until you recover your loss, then sell?

c) Smile and buy more, sure that everyone else is dead wrong?

d) Study and reconfirm your assessment of the company, then smile and buy more?

If you answered "d," you may have a future at Berkshire Hathaway, the financial juggernaut whose 76-year-old chief executive and godhead, Warren Buffett, is searching for a successor. That's because, in addition to the requisite financial smarts, you'll need the sort of temperament to do what the "Oracle of Omaha" has long done best: take advantage of the market's temporary insanity to stock up on sure things at bargain prices.

It's a strategy that has not only helped Buffett become the second-richest man in America, with a net worth of $52 billion, but has also made him the most watched—and copied—investor on Wall Street. Politicians from Arnold Schwarzenegger to Hillary Clinton seek to hobnob with him. And no wonder. Whether through Berkshire's spiraling stock price, mutual funds that mimic his strategy, or investors aping his stock picks, Buffett has probably made more money for more stock market investors than anyone else in history. Each year thousands of those winners and devotees make the pilgrimage to Berkshire Hathaway's shareholder meeting in Omaha, turning the event into a celebration of the man and his financial mastery.

Of course, if you're not one of those people (or you answered "a," "b," or "c" to the above question), fear not. In the following pages, we tell you what it takes to invest like Buffett, whose strategy goes far beyond the simplistic "buy and hold" approach for which he is famous. For example, although he has described derivatives as "financial weapons of mass destruction" and has bashed hedge funds, Buffett has invested in both over the short term and has made hundreds of millions of dollars in the process.

And while he is perhaps the world's leading expert on managing risk—a talent honed through his investments in insurance companies—he scoffs at the idea of spreading around your bets. "Diversification is a protection against ignorance," Buffett says of index funds that hold hundreds of stocks—a sharp contrast with Berkshire's portfolio, in which the top 10 stocks account for more than 90 percent of its assets. "It makes very little sense if you know what you're doing."

You'll better know "what you're doing" after digesting the following pages, in which we plumb not only Buffett's investing style but also those of fund managers who have learned to tweak it to their own—and their shareholders'—advantage. This investing guide marks half a century of Buffett investing and records the ideas of a man whose acumen seems undiminished. Yet even though Buffett says he's in excellent health ("It's amazing what Cherry Coke and hamburgers will do for a fellow," he jokes), Buffett of course admits that he isn't getting any younger. And with no obvious heir apparent in place as Berkshire's next investor-in-chief, it's clear that even longtime Berkshire stockholders will eventually need to start thinking for themselves.

Which, after all, is what made their beloved leader so successful in the first place. And learning to think the Buffett way might even help you land a new job.