Warren Buffett is not a stranger to the investing world and has been well-known as the world’s greatest investor by many. Today, he is worth $76 billion as reported by Forbes and while his success is a feat that every investor aims to replicate, he did not invest in a manner usually depicted by the media.
Instead, Buffett has an unconventional yet efficient method of investing that has helped him to be where he is today. In this article, we uncover Warren Buffett’s strategies for being a successful investor.
Understand the businesses you’re investing in
Buying stock in a company makes you the owner of a small share of that business. Before you start investing, you should have a basic understanding of what the business does and how it makes money. Warren Buffett believes that when stockholders think of themselves as part owners of the business they are investing in, they will be more focused on the longer-term.
A lesson we can learn from Warren Buffett is the way he has avoided tech stocks, as he doesn’t understand the business model compared to other types of businesses. His Berkshire’s stock portfolio focuses on industries such as banking, insurance, utilities, and consumer products — which are businesses that Buffett understands very well. Hence, he is willing to take the risk by investing a substantial capital into industries and companies that are familiar to him.
Having a clear understanding of the businesses you’re investing in helps you to stay current on the industry trends and news.
An investing strategy based on hype or other people’s stock tips is a recipe for long-term failure. If you are interested in a company you do not know but hear a lot about, research it first.
Learn the basics of value investing
One of the advantageous traits of Buffett is his knowledge of value investing. It’s essential to have a foundation for evaluating stocks and identifying overlooked value in the market.
“What is smart at one price is stupid at another.” – Warren Buffett
The famous quote above by Buffett underlies the importance of being a value investor — one who buys stocks that have a low price-to-earnings ratio. Buffett is known for his ability to look for companies that offer good stock prices, sound management, and a competitive advantage. When those reasons are no longer present within a company, he will sell the stock.
This is proven with the first 20 companies invested by Buffett, in which today he only holds the investment in Berkshire Hathaway. In contrary to most expert investment tips, buying a stock and holding it forever is not what the Sage of Omaha does.
If you’re an aspiring value investor, “The Warren Buffett Portfolio” book written by Robert G. Hagstrom is worth the read as it gives valuable insight into how Buffett thinks about investments and his psychological mindset that made him successful. This article by Investopedia summarizes the book into eight bite-sized investing tips by the legendary investor.
Invest in good management
Beyond just identifying cheap stocks with growth potential and competitive advantage, Buffett also places his investment based on good management. He will only invest in stocks if he trusts the company’s management and is confident that it will act in the shareholders’ best interest.
While stock prices may change depending on many factors, good management can sustain the company for the long-term. Some of the positive signs of a good management include a history of dividend growth and buybacks, and excellent reputation proven over time. Such companies will also stand the test of time in the most challenging situation of a recession.
This also explains why Buffett isn’t afraid to make significant investments in companies that he believes to have a good management. He is a firm believer that investors must first do their homework before investing. After that process, investors should feel comfortable enough to dedicate a sizable investment and trust the management.
For Buffett, it’s not just about finding the best company, but it’s also about how you feel about the company.
Keep a long-term mindset
When you look at Berkshire Hathaway’s stock portfolio, you can spot a trend of Warren Buffett going into investments with a long-term mentality. This is aligned with another of his famous quote saying, “Our favorite holding period is forever.”
While that doesn’t necessarily mean Berkshire will hold any of its stocks forever as they do sell stocks regularly, Buffett is stressing the point that if he can’t see himself owning the stock for years, he won’t buy it. The Warren Buffett way is to not fall into buying stocks just because of a good quarter performance, or the promise of an upcoming new product.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” – Warren Buffett
By having a long-term mindset, you can also avoid paying huge commission fees and high short-term capital gains taxes. This will help you to overcome any short-term fluctuations in the business and to reap the rewards of increased earnings and dividends over time.
Learning to invest like Warren Buffett does not automatically equate success, but if you implement some of his proven strategies, you could make better choices when investing in stocks for greater returns.
We’ve summarized all the four strategies in the form of an infographic, so you can visualize and understand it better. Check it out below!