Over the years, Buffett has become a sort of hero to the investment community, with his mix of forthrightness and folksy wisdom.
His annual shareholder meeting, dubbed the Woodstock of Capitalists, draws investors from all over the globe – keen on getting advice from the main man himself.
And can you blame them? The man is worth well over $60 billion, a truly astonishing figure. He’s presided over the growth of Berkshire Hathaway into an absolute giant.
Buffett has been at the head of Berkshire for 50 years and in that time he’s developed a brand of his own: he’s got his own Tao of investing. Here are some of the central tenets.
Stick with what you know
Sure, the Oracle of Omaha is considered one of the greatest investors in the world, but there are areas where even he won’t go. He suggests that investors stick to buying what they know and the man follows his own advice. Buffett has often said he will not invest in high-tech. Ever. He doesn’t understand it and his portfolio reflects that fact.
It makes sense. Why would you put money into a company selling something you don’t understand or perhaps – don’t even use? Sticking to your “circle of competence”, as Buffett puts it, enables you to focus on the things you DO know and leverage your personal expertise. When you leave your circle of competence, you better be prepared to conduct massive research or realize that you are merely speculating.
It can seem kind of…boring. Or else you may be thinking, “Errr…there’s not much that I really know.”
Real talk: You know more than you think.
Peter Lynch, another investing great, was also a proponent of investing in what you know. He’s said time and time again that his best ideas came from his family. Namely, he would see what products and brands his kids or his wife would be using and raving about. He’d invest in that. It’s hard to go wrong when people consistently love a product a company produces. Hmm…kind of sounds a bit like Apple computer.
Don’t Listen to Others
Buffett advises you to not listen to anyone.
Except for Warren Buffett. Probably listen to Warren Buffett.
There are so many ways to invest in the market. There’s active trading, passive investing, high frequency trading, and the list goes on and on. Everyone has an opinion on what the “right” way to invest, and everybody claims their way is the best. There are others who will talk about timing the market, laying out the reasons why NOW is the right time to buy. Anyone who thinks they can predict the short-term movements of the stock market is either wrong or lucky.
As Buffett says, “market forecasters will fill your ear but will never fill your wallet”. That’s the problem isn’t it? All those people who have an opinion aren’t going to make you any money. No, that’s your responsibility. Base your decisions on actual research rather than the cajoling and optimistic words of others.
Buffett doesn’t listen to any of it. He outlined his investment philosophy decades ago and he’s loyally stuck to it, buying fundamentally solid companies at a discount whenever possible…and holding them forever.
Understand What You’re Buying
Buffett invests in businesses that he understands. Ever since the man picked up a copy of Benjamin Graham’s The Intelligent Investor, Buffett has strived to invest in businesses that are undervalued. He wants to buy really good businesses that he really understands, at a really good discount.
The majority of his stock holdings are in the financial and consumer goods companies. Geico, Wells Fargo, American Express mix well with other giants such as Coca-Cola and Walmart.
To understand a company well enough to invest in it, Buffett first needs to know what its competitive advantage is. This idea comes from Benjamin Graham, the idea that you should invest in businesses with a significant moat, or business advantage, that will allow it to outperform its competitors.
Both Geico and Walmart are companies that have huge moats in terms of both market share and being the dominant low-cost provider in their respective industries. Coca-Cola’s competitive advantage is its brand recognition. Everyone and their mom knows what it is.
Buffett also makes sure he has what he calls a margin of safety. As a value investor, Buffett seeks out companies that are worth more than the price at which they’re selling. If Buffett thinks Coca-Cola is worth $100 billion but the market is pricing it at $75 billion…the difference between the two is his margin of safety. If a stock is already available for sale at a discount, there is significantly less downside.
Some raised their eyebrows when Buffett invested half a billion dollars in PetroChina – a seemingly aging oil company with creaky, aching joints – but W.B suspected that it was severely undervalued in 2003 with a market cap of $37 billion. When he eventually sold the stock, it was valued at $275 billion.
Where will the Business be in 10 years?
Warren Buffett has often said you should only buy something if you’d be happy to hold it for 10 years. As in, if the market suddenly shut down you wouldn’t even bat an eyelid.
It’s clear that Buffett is a buy and hold investor and that he’s always looking far into the future when contemplating a purchase. After all…Buffett purchased American Express back in 1964. As he says, “our favorite holding period is forever”.
The company was embroiled in a scandal at the time, but Buffett saw the inherent value and snapped it up. Similarly, he bought Coca-Cola back in 1989. Now these are long-term investments!
When you adopt this approach you suddenly become very selective – and why not? It’s your money.
Diversify, diversify, diversify
Buffett has been quoted as saying “diversification is protection against ignorance”.
He prefers to make big bets on a few great companies.
Even if you do all your homework, even if you cross all your t’s and dot all your i’s…you still can’t know EVERYTHING about a business. An investor who puts all their money in one company is inviting trouble. What if something goes wrong? Better to spread your money around enough to mitigate your risk.
The problem is when people stop doing their homework and rely on diversification alone to yield them good returns. That’s why Buffett is so negative on diversification.
To learn more about Warren Buffett’s personal style of investing, check out this course called “Investing Like the Greats“!