Warren Buffett started investing at the age of eleven and is today one of the world is richest people — not by speculating, trading frequently or following trends, but by doing the same thing over and over for more than seventy years: finding good companies and owning them for a long time.
His approach is called value investing, and while the principles are simple, they require discipline, patience and the courage to go against the crowd.
Buffett learned value investing from his mentor Benjamin Graham at Columbia University. Graham developed the idea that stocks are not just pieces of paper that fluctuate in price — they represent ownership in real companies with real values.
Graham is key concept: margin of safety — never buy a stock at full price. Buy it with a margin of safety, so you are protected even if your analysis turns out to be wrong.
Buffett never invests in anything he does not understand. He calls this his circle of competence — what he actually understands. He avoided technology stocks for years because he did not understand the business models well enough.
The question he asks himself: Can I predict with reasonable certainty what this company will look like in ten years?
Buffett is favourite concept is the economic moat. It is what protects a company against competitors, just like a medieval castle with a moat was difficult to attack.
Moats can be:
Buffett invests in management as much as in companies. He looks for leaders who treat shareholders money as their own — and who are honest even when things go badly.
He reads annual reports thoroughly — not just the numbers, but how management communicates. Do they use passive language when things go wrong? A red flag.
A wonderful company can be a poor investment if you pay too much. Buffett uses intrinsic value as his benchmark. He calculates what the company is worth based on future cash flows, and only buys if the market price is below that value.
Buffett compares himself to a baseball player who does not need to swing at every pitch. He can wait — for months, years, decades — for the perfect pitch. Most investors feel pressure to do something all the time. It is Buffett is advantage that he does not.
Buffett is holding company Berkshire Hathaway owns among others Geico (insurance), BNSF Railway, Dairy Queen, and large shareholdings in Apple, Coca-Cola, American Express and Bank of America. The common denominator: all have strong moats and predictable earnings.
Yes — but with some adjustments:
Buffett himself recommends that most private investors buy a low-cost S&P 500 index fund and hold it — because few people have the time and knowledge to do the thorough analysis that value investing requires.