Investing Like Warren Buffet in the Stock Market
Investment Style of World's Most Successful Investor - Warren Buffet
Feb 12, 2009
Warren Buffet has accumulated a personal fortune and has also given generously on a massive multi-billion dollar scale. That personal fortune has been made almost entirely from Stock Market investing and Berkshire Hathaway has an enviable long term record for delivering superior results. Much has been written about Buffet and his investment style, but it is not consistent, and Buffet himself has never tried to set the record straight, even in his latest biography.
Warren Buffet Investment Style
There are a number of authors that have written about Warren Buffet's investment style such as Robert G. Hagstrom, Mark Tier, James O'Loughlin, Janet Lowe, Lawrence A. Cunningham, David Clark, Alice Schroeder and Mary Buffet. From these there is broad agreement that Buffet's investment style is:
- Investing in the stock market is the long term investment in a business, not just buying shares for a fast turn on the market price
- Value based in approach with a margin of safety, think Benjamin Graham
- Identifying a business with a clear franchise, such as Coca Cola
- Focused on his circle of competence. Buffet famously avoided the technology boom and bust because he did not understand the business model and consequently how to value the business
- Finding great companies. Charlie Munger, Warren Buffet's long time business partner has apparently strongly influenced Buffet's style and being prepared to pay for good quality or outstanding companies
- Focused on a concentrated portfolio of a few businesses, as opposed to a diversified portfolio using concepts from the efficient market theory
- Being greedy when others are fearful and being fearful when others are greedy. Some of Buffet's most famous investments have been when particular stocks have fallen on hard times temporarily such as GEICO, American Express or Washington Post
Investing Like Warren Buffet
Investing in a business is investing like Warren Buffet; focused on finding a few great investments that will form the majority of the portfolio:
- Intrinsic value of a business. A great business, with a strong franchise, is independently valued using business tools such as discounted cashflow. No use is made of complex valuation calculations using equations. No use is made of technical market analysis such as Elliott Wave or the host of other technical chart patterns
- Margin of Safety. Buy a great business at a good price, typically when a company is experiencing temporary difficulties or is suffering like other businesses from a general market downturn. Buffet has often been quoted as liking to buy 1 dollar of value for 70-80 cents, which represents a margin of safety
- Limit transaction costs by buying and holding shares for the long term and avoid being overly influenced by short term fluctuations in the share price or overall market
World's Most Successful Investor
Warren Buffet has been identified by many as the world's most successful investor. Whilst he has written many essays and talked extensively to investors including at the Berkshire Hathaway AGM, there is still a mystique about his investment style because it is extremely hard to duplicate the results. The investment style is known - and simple - but it is not easy to practice it. It is even harder to produce similar results. In short, be patient and use market opportunities to buy great businesses at good prices.
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