Warren Buffett is the most famous investor of all time, and one of the greatest too. He started investing as a small boy and eventually grew his net worth to over $85bn. Luckily for us, Buffett has been very open about how he invests, and here are some simple strategies he has used in his success.
The power of patience
Warren Buffett didn’t get rich overnight. Instead, he compounded his capital every year over a long period of time. Albert Einstein once said: “The eighth wonder of the world is compound interest”, and it’s hard to disagree looking at Buffett’s success.
His strategy of buying quality companies regardless of market conditions has paid off. Going against the herd when everyone was buying technology stocks in the Dotcom bubble was tough for him.
But unlike those who lost their shirt, Buffett has stood the test of time with his long-term thinking. He believes that the stock market is a weighing machine, and the longer he holds a stock the closer it comes to the right valuation.
Warren Buffett was a student of Benjamin Graham, known as the ‘father of value investing’. Buying stocks with a ‘margin of safety’, he was able to buy stocks below their intrinsic value and protect the investor from potential downside. Rather than paying high earnings multiples and buying expensive stocks, Warren would buy quality shares at the right prices.
Given that Warren Buffett is quoted as saying “My favourite holding period is forever”, he needs to buy stocks where companies have a long-term competitive advantage – or moat.
Buffett’s big bet on The Coca-Cola Company has paid off handsomely, with the soft drink behemoth being the owner of a commanding position globally. Buying companies that won’t go out of fashion and that have a competitive advantage has been a great investing strategy for Buffett and one that we can use too.
How to invest like Warren Buffett
There are some great lessons we can learn from the one of the world’s best investors, and if we want to emulate his success here is a good place to start:
- Understand the business model and how a company makes its money
- Buy the company at the right price rather than an expensive price
- Companies that trade below their intrinsic value provide a ‘margin of safety’ for the investor who wants low-risk investments
- Look for long-term competitive advantages that produce strong cash flows
Of course, investing like Buffett requires some hard work too, but knowing how he made his money can help you to make better investing decisions. Over time, he has averaged around 19% per year. Being able to keep a cool head when everyone else is losing theirs has propelled Buffett to huge fortunes.
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Michael Taylor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.