Warren Buffett is 90 today. He got rich decades ago, and could have retired early. Instead, he remains as passionate as ever about finding businesses for his Berkshire Hathaway group to invest in or acquire.
Nevertheless, if I wanted to get rich and retire early, I’d still invest like Buffett. No one’s yet come up with a set of financial metrics to explain all his past investments and predict his future ones. But I reckon the key to his success is really quite simple.
Warren Buffett doing the business
Buffett’s advice to his Berkshire Hathaway shareholders reflects his own approach to investing: “Visualize yourself as a part-owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family.”
When investing in a company, Buffett is first and foremost interested in the business itself. More specifically, how it works, and its prospects for making a good economic return over a long-term horizon.
Two important things flow from this. First, you have to understand the business. As Buffett has said: “You only have to be able to evaluate companies within your circle of competence.”
Second, as you’re expecting to remain a part-owner of the business indefinitely, he reckons the key is “determining the competitive advantage of any given company and, above all, the durability of that advantage.”
Wide moats rule
Buffett often refers to a company’s competitive advantage as its moat. He sees a wide moat as “the primary criterion of a great business.” Powerful brands, valuable intellectual property, advantageous geographical location, or sheer size (economies of scale) are some of the things that can help produce a wide moat.
Such is the importance of this to Buffett that he’s said: “We tell our managers we want the moat widened every year. That doesn’t necessarily mean the profit will be more this year than it was last year because it won’t be sometimes. However, if the moat is widened every year, the business will do very well.”
Warren Buffett in a nutshell
I’d invest like Buffet to get rich and retire early by identifying my circle of competence, and seeking out great businesses with durable moats within it.
Buffett has put his approach in a nutshell: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now.”
Okay, but what about the “purchase, at a rational price” bit?
Many happy returns Mr Buffett
Over decades, due to market sentiment, there will be times when a company’s shares are on the expensive side, times when they’re at a rational (fair) price, and times when they’re on the cheap side.
If you’re regularly buying shares and reinvesting your dividends through your working life, as most investors do, I don’t think you need to sweat too much about the price you’re paying at any one time. This is because there’s every chance your multiple purchases over the years will average out at a rational price.
So there you have it. Circle of competence. Wide moats. Rational prices. Many happy returns (pun intended!) Mr Buffett.
