Warren Buffett is an investing legend.
From 2008 to 2018, his company, Berkshire Hathaway, cumulatively returned 119.7% in comparison to the S&P 500 Index returns of 73.2%. This is a huge difference and goes some way to explaining the Sage of Omaha’s vast wealth.
As individual investors, we are lucky that over the years he has shared some of his wisdom and insight in interviews and letters to shareholders.
So, what do we know about Warren Buffett’s investment philosophy?
Buy what you know
Historically, Buffett has only invested in businesses that he understands. If you look at some of the past companies he has bought a share of, you will note that many are operating in traditional industries like consumables, banking, and insurance.
If you don’t understand how a business makes its money, then you cannot grapple with the dynamics of its industry and where it comes under threat from competitors. If he doesn’t understand how a business can return value to an investor, he moves on to another opportunity. This strategy has helped Buffett avoid disasters like the dot-com bubble.
As a value investor, Warren Buffett’s priority is finding wonderful companies. He has stated that “it is better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Although he’d rather buy a company trading at a price below its intrinsic value, I think he realises sometimes quality businesses are only ever valued fairly.
His investing style has evolved since his early years when he would seek out “cigar butt” companies. Normally, these businesses had suffered from a previous hiccup but might offer a final glimmer for the investor to sell at a nice profit – like a cigar butt found on the street, only offering one last puff.
Buy stocks as if you are buying the whole business
Another piece of Buffett advice is to imagine you are buying the whole business. If you’re anything like me, thinking like this will make your due-diligence checks more thorough. For example, you’ll probably look at the management of the company in more detail.
A quick internet search of the CEO of a company could spring up an interesting fact about their qualifications for the role.
The more knowledge you have about the company, the better.
Favourite holding period
Buffett has stated that his preferred holding period is forever. He doesn’t buy a company with a mind to how much it will be worth in the future.
I think this principle leads an investor to stop chasing the next big thing and unwittingly buying into a bubble.
I believe Buffett’s advice helps to take some of the adrenaline and emotion out of investing. It’s best to slow things down and take a moment to ensure you’re making a decision that you are comfortable with.
T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). 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.