Warren Buffett, as we all know is one of the most successful investors and is the CEO of Berkshire Hathaway.
A philanthropist by nature, Buffet, as of today is considered the third wealthiest person in the world.
Warren Buffett was born in Omaha, Nebraska (he is also known as the Oracle of Omaha) and completed his education from Wharton School (University of Pennsylvania) and Columbia Business School, New York.
It is here that he found his passion for value investing when he met Benjamin Graham (known as the Father of Value Investing).
Though he had an interest in finance and investment since his childhood, it was only after meeting Benjamin Graham in Columbia Business School that he could shape his ideologies and mantras on value investing.
Starting from delivering newspaper in Washington D.C., Mr. Buffett today is the Chairman and CEO of Berkshire Hathaway, the company which was acquired by him and his partner Charlie Munger when they together formed Buffett Partnership.
In this article
Can you invest like the financial guru?
The best takeaway for investors from Warren Buffett can be the things that he looks for before putting his and the shareholders money in companies that he invests in.
Some of the most important points have been discussed below:-
Companies within Mr. Buffett’s Circle of Competence
Buffett makes sure that the companies that he invests in are under his circle of competence, meaning, he understands the business fully before taking a leap by investing in that company.
He always advises investors to make sure that they understand the business, only then will they be able to forecast the future performance of that business.
A prime example of this was when Mr. Buffett refrained from investing in technological companies during the massive boom that these stocks witnessed during 1990s.
As technology stocks were not in the area of surveillance of Buffett, he did not understand the business fully, therefore, he chose to stay away from that sector.
This eventually proved to be a great decision as technology stocks plunged a lot and most investors had to face the brunt going forward.
Quality of Management
This is one of the most instrumental things that Mr. Buffett looks for before placing a bet on a company. He is very particular about the quality and honesty of the management of the company in question, mainly because it is the management that will drive the future course of the company.
He also takes into account the management’s decision-making towards reinvesting in the business for future growth.
Knowing the difference between price and value
Mr. Buffett believes that the stock prices might change as per the investor sentiments but that does not necessarily that the company’s stream of cash flow has changed.
He puts in a lot of time reading the financial statements of the company he wants to invest in.
One of the most important financial ratios that he looks at in order to gauge the performance of any business is return on invested capital.
He believes that companies that earn high returns on capital tied up in their business have the wherewithal to compound their business faster than lower-returning businesses. With this, the true or intrinsic value of the enterprise rises over time.
As Warren Buffett puts it ‘Price is what you pay, Value is what you get.’
Economic and financial moats
Moats in this context of investing means that the company possesses some specifications which is unique to that particular company and differentiates it from most of its competitors.
These moats can mean anything such as patents, presence (geography), presence in niche category, brand value, economy in costs etc.
At the same time, Mr. Buffett does not invest in Initial Public Offerings (IPOs) and has a knack of investing in companies who have been in the public domain for at least 10 years.
Apart from knowing the things Mr. Buffett looks at while investing, these are the things he advices:
1.Buy a stock forever. No, we’re not joking.
Warren Buffett clearly follows and believes in the buy and hold strategy.
He believes that excellent businesses are difficult to find and once someone has got hold of it, he/she should hold it for years to reap its optimum benefit.
As he famously quotes, “Our favorite holding period is forever.”
2.Diversification is deworsification
Though normal retail investors allude to the fact that diversification is important when you are playing in equities, Mr. Buffett does not belong to this school of thought.
He personally believes to hold a few specific stocks in one’s portfolio for a longer time horizon.
He has been following this since his early investment days.
3.Not agreeing to every news article that comes your way
Mr. Buffett believes that market news is made to create hype or noise around a particular stock and one or two-quarter results is not a true reflection of a company’s long-term performance.
Keeping this philosophy in mind, Buffett always advices investors that during such times they should ask a question, that whether such performance or negative news will impact the company’s long-term earnings power.
If not, the investors should continue holding the stock.
Current Portfolio of Warren Buffet
Now, looking at some of his biggest you must be intrigued about his current position.
Not to worry, a chart showing his current portfolio is shown below:
|Companies||% of Holdings|
|Wells Fargo & Co||11.41%|
|Bank of America Corp||9.72%|
|The Coco-Cola Co||8.95%|
|Kraft Heinz Co||8.75%|
|American Express Company||7.90%|
|Delta Air Lines, Inc.||1.74%|
|Southwest Airlines Co.||1.69%|
Note: Holdings as of 30/06/2018 as reported in Berkshire Hathaway’s 13-F Filing
Investing in India
Lastly, we would like to highlight to our investors that recently Mr. Buffett has also placed a bet on India by investing in Paytm (One97 Communications Pvt. Ltd.).
This is an endorsement from one of the best investors in the world to bet in the dynamic technology domain.
This also opens the gates for future businesses that Mr. Buffett might look for, in India.
Therefore, we believe those investors looking to be long-term players should abide by the hard-core principles that Mr. Buffett highlights as he has personifies long-term investing.
Some recommended books by Mr. Warren Buffett are
- The Intelligent Investor by Benjamin Graham
- Security Analysis by Benjamin Graham
- Common Stocks and Uncommon Profits by Philip Fisher
- The Little Book of Common Sense Investing by John C. Bogle
You probably won’t be able to implement all of Warren Buffet’s policies, but you can implement some. And if you implement them well, it can make a huge difference to your investments.
So analyze your investments. Save, invest, groww.
Disclaimer: The views expressed on this post are that of the author and not those of Groww