Warren Buffett is undoubtedly the most respected investor of all time, and for a good reason. He is the Chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of over $80 Billion. In this article, we’ll try to decode Warren Buffett’s investment strategy. We’ll try to understand how one of the most successful investors in the world invests.
Warren Buffett’s investment style is Extremely Simple. One of the most important things you need to know about Warren Buffett is that he makes long term investments. He quotes “Someone’s sitting in the shade today because someone planted a tree a long time ago” Some things really take time.
Invest with a Long Term Strategy
If you want to know how to invest like Warren Buffett, the first thing you need to do is stop chasing short-term profits. Warren Buffett does not judge his investment success by looking at how well his stocks have performed over the past week, month, or even year. Instead, he focuses on returns over a period of years. Buffett doesn’t even buy stocks because he feels their share prices are going to rise. He’s focused on buying good, well-run businesses. This has definitely worked to his benefit. As Buffett says, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” While there are certainly exceptions, Buffett approaches all investments as if he’s going to hold them forever.
Never Over Diversify Your Portfolio
Buffett feels that having an undiversified portfolio of businesses that he understands is better than having a diversified group of stocks that he is not well equipped to assess. If you look at his current portfolio you may find that there isn’t a ton of variety. Specifically, among Berkshire’s top 10 holdings, you’ll find no fewer than six banks, as well as two large investments in food companies.
Buy Companies You Understand
Many observers might say that Berkshire’s portfolio lacks diversification, and that’s true; however, Buffett believes that’s not necessarily a bad thing. In fact, you could say that the lack of diversification is responsible for Buffett’s best investment returns. As he says, “You only have to be able to evaluate companies within your circle of competence.” In other words, if you know banks well, as Buffett does, there’s absolutely nothing wrong with owning a lot of bank stocks. Having a deep knowledge of the sector gives Buffett a better sense of the actual value of the businesses he’s holding, and he’s one of the most value-oriented investors in the business.
“Price is what you pay, and value is what you get.” The basic concept of value investing is simple. By investing in stocks that are trading for less than their true worth, you have an inherent advantage as a long-term investor. However, finding stocks that are trading at a discount is easier said than done. Buffett himself has referred to Graham’s book The Intelligent Investor as the best book on value investing ever written.
Buy Companies with Strong & Honest Management
It isn’t easy to state how much value Buffett gives to Outstanding Management. He suggests Looking for companies with a strong track record of raising dividends and whose management team has their interests aligned with those shareholders.
While Buffett does tend to have long-term relationships with the stocks he buys, he also isn’t bound to them. Buffett once said, “
All there is to invest is picking good stocks at good times and staying with them as long as they remain good companies.”
While Buffett is certainly a buy-and-hold investor. But, he sells shares regularly and for a variety of reasons. If Buffett’s original reasons for buying a stock no longer apply, he won’t hesitate to move on.
As an example, it might surprise you to learn that Buffett owned nearly 9% of FreddieMac in 1998, a stake worth $3.9 billion at its peak, and a massive 1,200% return for Berkshire. However, in 2000, Buffett sold nearly all of his position. Why would he sell off such a successful investment? Well, Buffett noticed that the management team was becoming too focused on delivering quarterly results, and they were starting to take on more and more risk to achieve those goals.
The lesson: Don’t be afraid to walk away from an investment if you don’t like what’s going on in that company now, regardless of whether that stock is going up or down.
Buy Companies with Strong Competitive Advantage
Another concept that’s important to Buffett’s investing style is identifying durable competitive advantages. For example, Apple’s loyal customer base gives the company a big advantage going forward and is a big reason why it is Buffet’s largest holding. Coca-Cola has a massive distribution network and one of the best-known brands in the world, the combination of which gives it efficiency advantages and pricing power over its peers.
Market Crashes are Biggest Opportunities
Many investors fear market crashes, and it’s not hard to see why. Nobody enjoys watching the value of their investments going down, and high volatility can certainly be scary. But Buffett has frequently advised investors that these are some of the best times to buy. Some of his most successful investments have come during and shortly after market panics. So, market crashes are good for long-term investors who have the guts to take advantage of the crisis. This is the reason why Buffett likes to have a decent amount of cash on the sidelines at all times, and why Berkshire avoids debt.
Focus On Learning
As Buffett says, “Predicting rain doesn’t count. Building the ark does.” Buffett doesn’t spend his workday sitting in meetings or watching the financial news, or even analyzing stocks that much. Instead, the activity that takes up most of his time is sitting and reading. He regularly reads hundreds of pages a day and has said, “That’s how knowledge works. It builds up like compound interest.” He believes that the more knowledge an investor gains, the better position he’ll be in to make wise decisions and avoid making mistakes.
Summary of Warren Buffett Investment Strategy
To recap, you can simplify Warren Buffett investment strategy down to a few core things:
- Investing for the Long term
- Buying Good Businesses that are easy to understand for You,
- Looking for strong management teams and companies with durable competitive advantages,
- Viewing market dips as opportunities,
- Learning; always learning.
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