American octogenarian business magnate, investor, and philanthropist Warren Edward Buffett has become a poster boy for effective investing.
That’s not surprising because he’s considered by many to be one of the most successful investors the world has ever seen. At the last count, he was the third-wealthiest person on the planet with a net worth of around $82bn – a truly jaw-dropping amount of money for one person to command!
The business perspective
But he didn’t build up his fortune from scratch by buying and letting property. Instead, he channelled his earnings into buying shares on the stock market. And he didn’t do that without studying hard along the way. For example, he was influenced early on in his investing career by the teachings of Benjamin Graham.
Buffett read Graham’s book The Intelligent Investor in 1950 and has embraced the principles outlined within its pages ever since. Graham teaches us in the book to look for good value and to invest from a business perspective.
In other words, we should view holding shares as owning a small part of the underlying business. One way of considering it is to ask, “if I could own all of the business, would I want to?” If the answer is “no”, we shouldn’t entertain owning the shares even for a moment.
I’m attracted to the idea of investing in shares from a business perspective. Even though investing requires a lot of work and study, I’d rather aim to get rich and retire early by investing in the stock market than by rolling up my sleeves with a buy-to-let business. Warren Buffett serves as a shining example it can be done.
Buffett started off buying the shares of companies with bargain-basement valuations without worrying too much about the quality of the underlying businesses. Sometimes the shares would go up because they had previously been undervalued, or perhaps because of a slight improvement in the outlook.
But often, the long-term outlook for these firms was grim. Buffett was trading value, and would often sell his shares to lock in his gains when he had them. A few of his bargain purchases went on to become enduring long-term investments.
Quality and value for the long haul
But his strategy evolved because straight-forward value investing stopped working very well. Even Graham himself told us that back in the seventies. Instead of just looking for ‘cheap’, Buffett now looks for good-quality businesses selling at a fair price and then aims to hold his shares for the long term.
The strategy is exemplified in the activities of the company in which he serves as chairman and chief executive, Berkshire Hathaway. Remember the idea about only owning shares if you would be happy to own the entire underlying business? Well, the Berkshire Hathaway conglomerate does own many entire businesses from diversified industries. All are chosen for their quality characteristics by Buffett and his team and purchased at fair prices with very long holding periods in mind.
By following Buffett’s investing style of focusing on quality, value and a long investment time horizon, I reckon most investors have a shot at getting rich and retiring early.
