Warren Buffett is widely regarded as the greatest stock market investor of all time. Over the last 60 years, the investing guru – who recently stepped down as CEO of Berkshire Hathaway – has generated a return of around 5,500,000% for his investors.
Here, I’m going to highlight what I consider to be the key pillars of Buffett’s winning investment strategy. By applying these principles, I think investors could potentially have a lot more success building long-term wealth.
A focus on quality
Buffett started off as a classic ‘value’ investor. His aim was to find companies that were out of favour with investors (what he called ‘cigar butt’ companies) and deeply undervalued, and wait for a turnaround.
However, over time, he moved away from this strategy and became more of a ‘quality’ investor. Ultimately, he realised – as many investors often do – that in the long run, the quality of a business is often a bigger driver of investment returns than the initial valuation.
We can see this focus on quality in his portfolio today. A good example is Apple (NASDAQ: AAPL) – his largest holding.
This is without a doubt a high-quality company (and could be worth considering as a long-term investment today). It has a strong brand, a huge market share, brilliant products, long-term growth potential, a high return on capital, a strong balance sheet, massive cash flows, share buybacks, dividends, an excellent CEO, and more.
And it has been a brilliant investment for Buffett. At one stage, it was a ‘10-bagger’ for him.
A long-term investor
Now, one reason Apple has been such a great investment for Buffett is that he has held the stock for many years. He first bought it in 2016, so he has been an investor in the company for almost a decade.
This long-term approach to investing can really pay off. If one holds onto a high-quality growth company for many years, the investment returns can potentially be enormous.
Sadly, a lot of investors today miss out on big returns because they think in weeks and months instead of in years or decades. One of my friends recently bought a stock and then two weeks later decided he wanted to sell it.
If one is looking to generate outsized returns from the stock market, the key is to find companies that are able to generate strong internal returns, reinvest these returns, and then repeat the process continually, and stay invested in them for the long term while they compound their returns. This is how Buffett made a lot of his money.
Big bets on individual companies
Finally, Buffett has never been afraid to make big bets on individual stocks. And this has boosted his returns significantly.
By letting winners like Apple get bigger and bigger in his portfolio, he has managed to outperform almost every other professional investor. Most professionals don’t have more than 5% of their portfolio in any one stock, however, at one stage, Apple was about 45% of Buffett’s portfolio (he recently sold a lot of Apple stock).
Of course, this approach is risky. If 45% of your portfolio is in Apple and the stock falls 25% for some reason (e.g., weak sales, competition from rivals), your overall portfolio returns are likely to be poor.
But letting your winners run has proven to be a successful strategy. It has certainly worked for Buffett.
