How to invest like Warren Buffett
If his estimated fortune of $52bn isn’t enough to prove it, then his skill and track record is.
Warren Buffet: the man who makes up part of the Forbes’ 10 richest people in the world. Even as a child, Buffett displayed an interest in making and saving money. His first business experience was selling chewing gum, Coca-Cola and weekly magazines door-to-door. Before this, and whilst at school, he made money doing a paper round, selling golf balls and stamps, and detailing cars. When he was just 14 years of age, Buffett filed his first tax return where he took a $35 deduction for the use of his bicycle and watch on his paper route. A year later, Buffett and a friend spent $25 on a used pinball machine, which they strategically placed in the local barber shop. Needless to say, within months they owned several machines spread across various barbers shops. It was clear from an early age that Buffett had tremendous skill.
In 2011, shares in Buffett Investment company Berkshire Hathaway were valued at $103,500 per share, when he took over the company in 1965 they were just $15. Buffett has carved out a reputation for identifying companies that he believes were undervalued, then investing in them and holding the investment long term. Seem easy enough when it’s put like that, but just what are the keys to his success?
Firstly, it must be said that holding a stock long term take a huge amount of discipline and many of you who invest in the stock market will know. Investing in the stock market long term takes a lot of nerve and conviction in your decisions. Buffett is unlike many investors doesn’t look at business in the typical way; he has a belief that when he invests in a business he is buying it outright and not just buying shares. His reasoning behind this is because he looks at a company like he’s actually buying it; he will look at the management, if the business has a competitive edge and low capital expenditure.
EPA/MATTHEW CAVANAUGH
The second trend you will see in Buffett’s portfolio of companies is they tend to have strong brand name; Coca Cola, McDonalds and Gillette to name a few. Whilst these may not provide step growth, they do provide solid growth.
When Buffett invests in stocks, they are usually undervalued. Spotting these stocks is by no means an easy task; it’s easy to spot a stock that is unloved by the stock market, but to decide whether the stock is a dead stock or whether it’s undervalued is the key. To do this Buffett looks for the following: strong profitability, minimal debt, strong management and strong brand. Another key factor which he makes sure of is that he has a strong understanding of what the business actually does. He likes to invest in a business where he himself can understand and analyse the business and its model. It’s for this reason that he has, to a certain extent, ignored the technology sector and generally choses to invest in retailing, insurance and food.
Lastly, Buffett’s success comes down to his patience and his ability to not make rash decisions. Just as he holds stock long term, Buffett is a calm and calculated investor. He doesn’t go looking for things, but rather takes opportunities as they come along, saying that investors would be better off if they could only invest a limited number of times, therefore this would make sure they were making the right investment.
Rule No. 1: never lose money. Rule No 2: never forget rule no. 1
If the business does well, the stock eventually follows
It's far better to buy a wonderful company at a fair price than it is to buy a fair company at a wonderful price
Our favourite holding period is forever
This article was taken from a previous issue of Gentleman’s Journal. To subscribe to the magazine, see here.
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