The Motley Fool

What is Warren Buffett’s investment philosophy?

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.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

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.

There’s a ‘double agent’ hiding in the FTSE…

We recommend you buy it!

You can now read our new stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

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.