The Motley Fool

What is Warren Buffett’s investment philosophy?

Image source: The Motley Fool

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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. 

Wonderful company

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.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.