There are few better investors to model ourselves on than Warren Buffett. He came from humble beginnings and through sheer hard work became one of the world’s richest men.
The great thing about following the Warren Buffett investing journey is that we can use the shortcuts that he had to spend decades learning! So let’s look at the three top ways the Oracle of Omaha went about making his fortune.
Avoid trendy shares
Warren Buffett came in for a lot of criticism from Berkshire Hathaway shareholders for mostly ignoring the dotcom boom in the late 1990s and early 2000s. Investors saw trendy soaring shares like Pets.com and got a severe case of FOMO — fear of missing out. Eventually Pets.com collapsed 98% from its $11 IPO price to just $0.19 before it folded.
Today, those volatile flavour-of-the-month investments might be in gold miners, Bitcoin or companies involved in producing Covid-19 tests. If I hear lots of excited chatter about unproven AIM companies, I tend to avoid them. Let’s consider one example to prove this thought.
Now that Pfizer has announced it has a 90% effective Covid-19 vaccine candidate in the works? I think it renders much less valuable the future market for companies like Omega Diagnostics or Genedrive. Companies that are testing vaccines against one another, like Open Orphan though? I believe they’ll survive. Warren Buffett’s first lesson focuses on buying companies that already do or will pay a dividend, as well as those with true long-term potential.
Be an intelligent investor
Warren Buffett was a disciple of Benjamin Graham, commonly known as the father of value investing. Graham’s key tenet was to find successful companies that the market undervalued, then to buy big. After that, he sat on his hands until the market came around to a proper valuation.
John Neff had a similar style when he made millions as the head of the Vanguard Wisdom Fund. Neff is a less well-known name than either Warren Buffett or Ben Graham, but he still made his followers rich.
One of his most famous quotes is this: “Buy stocks that look bad to less careful investors and hang on until their real value is recognized.”
Neff and Graham’s contention — and one followed by Warren Buffett on his way to a net worth of $79bn — was that in the short term, the stock market over-values some companies and wildly under-values others.
Think long term like Warren Buffett
It may be many months before the market accurately values travel stocks. But with the Pfizer vaccine news on Monday 9 November, we got a taste of a market-wide re-rate happening live before our eyes.
To follow Warren Buffett I would be looking at FTSE 100 bargains trading at historically low P/E ratios. On my list are the likes of Taylor Wimpey (P/E of 7.2), or International Consolidated Airlines Group, which owns British Airways, Aer Lingus and Spain’s largest carrier Iberia.
In a matter of days the market has suddenly decided the outlook for IAG isn’t so bad after all. Its P/E ratio has crept up from 0.95 to 1.2. This is still extremely cheap and ripe for the plucking, in my view. Yes, I might have to sit my hands until the stock’s true value is recognised. But just like Warren Buffett I would be following a solid long-term plan.
TomRodgers owns shares in Open Orphan. 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 December 2020 $210 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.