Warren Buffett is one of the most respected and popular investors of all time. He was born in Omaha on August 30th, 1930. He developed an interest in the world of investing at an early age of 11. As of April 2021, his net worth is over the US $100.6 billion.
The exciting part that appeals to people is his ability to consistently beat the stock market for over 60 years. He was nicknamed the Oracle of Omaha for his brilliancy in investment selections.
What is his secret to success? What made him an investment legend?
Let’s find out!
Buffett’s First Investment and First Investment Lesson
Buffett made his first investment in a stock at an age of 11. He said, ‘I was wasting my life up until then’ when he was asked about his first investment.
In 1941, he purchased six shares of Cities Service preferred stock at a cost of US $38 per share. Shortly after, the share price fell to US $27. Buffett started to panic as the price declined. But soon, the share price climbed back to US $40 and he immediately sold all his shares.
Soon after he sold his investment, the share price shot up to more than US $200 per share.
This was when Buffett learned his first investment lesson of the virtue of patience.
‘The stock market is designed to transfer money from the active to the patient.’ – Warren Buffett
To pursue his higher studies, Buffett applied for Harvard Business School but was turned down. He eventually enrolled at Columbia University after learning that Benjamin Graham, the father of value investing, taught there. Buffett had read Graham’s book Security Analysis multiple times and looked at this as an opportunity to learn more from his idol.
Buffett was a successful student and this gave him an opportunity to directly work with Graham. He later claimed this to be one of the most valuable experiences of his lifetime.
Buffett Partnership Years
After his stint with Graham, Buffett started setting up investments focused on bargains.
He soon discovered companies that were trading at a discount to their net asset value. This is popularly known as the Cigar-butt approach. Buffett adopted this approach from his mentor Benjamin Graham.
Describing this approach, Buffett said –
‘Cigar Butt approach to investing is where you try and find a really kind of pathetic company but it sells so cheap that you think there is one good puff left in it. Though the stub might be ugly and soggy the bargain purchase would make the puff all free.‘
In this approach, Buffett would buy a large stake at bargain prices and wait for market sentiments to improve. Improvement in market sentiments would drive the share price up. Buffett would immediately sell this stake to earn profit.
During his partnership years, Buffett would write a letter to his partners every year. These letters would convey his investment rationale, philosophy along with partnership performance.
These letters are available in the public domain and are a must-read for investors. They withhold invaluable investment rationales and philosophies.
Warren Buffett Investment Strategies – Value Investing
Warren Buffett strongly advocates for value investing. He focuses on identifying undervalued quality stocks and investing in them for the long term.
Buffett’s two investment ground rules are –
- Buy what you understand
- Invest only for long term
Buffett became one of the wealthiest men in the world by following these two simple rules.
He invests in companies only if he understands their business operations. This habit saved him from suffering massive losses during the dot com bubble burst.
Between 1995 to 2000, internet and technology companies were new and untested. Buffett did not understand the tech and stayed away from investing in such companies. When the markets came crashing down during the bubble burst, Buffett safely avoided the crash by simply staying away from what he did not understand.
‘Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.’
#DidYouKnow Warren Buffett holds stocks of Coca-Cola, Wells Fargo, and American Express for more than 20 years. He once said that he has no intention to sell them.
You might be wondering, what is the point of holding it for this long? Why not instead indulge in short term and make quick money?
The simplest answer is that the power of compounding needs time and patience to do wonders.
Buffett learned this the hard way when he failed to earn higher returns from his first investment. He never dared to repeat the same mistake again and we all know how well it has paid off. Every year his investment compounds and adds value to his portfolio. All he had to do is research quality companies, invest in them and hold.
When you buy a stock, your intention should be to hold it no matter what. Look beyond the negative news. Most of them are speculations and are short-lived. If the company’s fundamentals are strong, they will outlive all their bad days and fetch you returns in the long run.
Impatient investors let anxiety and emotion control their decision-making. The best way to improve your patience is by ignoring the outside noise.
These two rules seem easy to follow, right?
As easy as they might seem, lot of investors fail to follow them. They normally end up not earning much or even worse losing their capital.
Every investor tries and wishes. But many fail to follow the route.
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Warren Buffett’s Investment Philosophy –
Buffett started focusing on Berkshire Hathaway, a textile manufacturing company. He originally bought it as a value investment in 1964.
He then realised that the company was getting stiff competition from domestic as well as foreign plants. The future was not very bright. So, Buffett turned Berkshire Hathaway into a holding company for his investments which he operates as a hedge fund.
Expensiveness in stocks made Buffett shift his investment philosophy. He no longer relied on the idea of bargains to stocks that were merely cheap and had wonderful business prospects. But in fact, he adopted a philosophy which believes that it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Warren Buffett and his Circle of Competence
Buffett says that it is important to know one’s circle of competence and stick with it. He added that the size of that circle of competence is not very important. But knowing the boundaries is very vital.
He says, ‘what an investor need is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence.’
Watch this video to learn how you can develop your own circle of competence with the help of a very practical example –
Here are few Warren Buffett stocks by the number of shares held based on Berkshire Hathaway’s most recent 13-F filing.
|American Express Company||AXP||15,16,10,700||$164.26||$24,903,573,582||19.10%|
|Bank of America Corp||BAC||1,03,28,52,006||$41.66||$43,028,614,570||12.30%|
|Bank of New York Mellon Corp||BK||7,43,46,864||$55.18||$4,102,459,956||8.60%|
|Bristol-Myers Squibb Co||BMY||2,62,94,266||$67.21||$1,767,237,618||1.20%|
|BYD Co. Ltd||BYDDF||22,50,00,000||$33.60||$7,560,000,000||8.20%|
|Charter Communications Inc||CHTR||52,13,461||$814.20||$4,244,799,946||2.80%|
|General Motors Company||GM||6,00,00,000||$49.17||$2,950,200,000||4.10%|
|Globe Life Inc||GL||63,53,727||$95.98||$609,830,717||6.20%|
|Johnson & Johnson||JNJ||3,27,100||$173.66||$56,804,186||0.00%|
|Kraft Heinz Co||KHC||32,56,34,818||$36.12||$11,761,929,626||26.60%|
|Liberty Global PLC Class C||LBTYK||18,76,522||$28.58||$53,630,999||0.50%|
|Liberty Latin America Ltd Class A||LILA||26,30,792||$14.22||$37,409,862||5.20%|
|Liberty Latin America Ltd Class C||LILAK||12,84,020||$14.36||$18,438,527||0.70%|
|Liberty Sirius XM Group Series A||LSXMA||1,48,60,360||$49.50||$735,587,820||15.30%|
|Liberty Sirius XM Group Series C||LSXMK||4,32,08,291||$49.40||$2,134,489,575||19.20%|
|Marsh & McLennan Companies, Inc.||MMC||41,96,692||$156.41||$656,404,596||0.80%|
|Merck & Co., Inc.||MRK||91,57,192||$76.50||$700,525,188||0.40%|
|MONDELEZ INTERNATIONAL INC Common Stock||MDLZ||5,78,000||$62.16||$35,928,480||0.00%|
|Organon & Co||OGN||15,50,481||$33.72||$52,282,219||0.10%|
|Procter & Gamble Co||PG||3,15,400||$142.93||$45,080,122||0.00%|
|Restoration Hardware Holdings, Inc common stock||RH||17,91,967||$716.75||$1,284,392,347||8.50%|
|Sirius XM Holdings Inc||SIRI||4,36,58,800||$6.27||$273,740,676||1.10%|
|SPDR S&P 500 ETF Trust||SPY||39,400||$452.23||$17,817,862||0.00%|
|Store Capital Corp||STOR||2,44,15,168||$35.89||$876,260,380||9.00%|
|Teva Pharmaceutical Industries Ltd||TEVA||4,27,89,295||$9.40||$402,219,373||3.90%|
|T-Mobile Us Inc||TMUS||52,42,000||$137.90||$722,871,800||0.40%|
|United Parcel Service, Inc.||UPS||59,400||$194.01||$11,524,194||0.00%|
|Vanguard 500 Index Fund ETF||VOO||43,000||$415.76||$17,877,680||0.00%|
|Verizon Communications Inc.||VZ||15,88,24,575||$54.77||$8,698,821,973||3.80%|
|Wells Fargo & Co||WFC||6,75,054||$48.41||$32,679,364||0.00%|
Source: CNBC (as of August 2021)
Buffett created this portfolio by religiously following value investment strategies which we discussed above. But there is one more thing which one cannot ignore which played an important role in the making of The Oracle of Omaha.
Buffett, His Books, and His Reading Habit
One common habit amongst all successful people is their habit to read. Warren Buffett reads more than 500 to 600 pages every day. He reportedly spends almost six hours a day reading books.
Surprisingly, he has never written a book but infact has more than 47 books with his name in the book’s title. His annual letters to his shareholders always include a couple of book recommendations.
Two very famous books which the Oracle of Omaha has mentioned at multiple occasions are –
- The Intelligent Investor by Benjamin Graham, and
- Security Analysis by Benjamin Graham and David Dodd
Both these classic investment books majorly focuses on value investing. Benjamin Graham, also known as the Father of Value Investing, led the foundation of this investment style.
So, before anything else, make sure you read at least these two books to understand Buffett’s investment strategy in a better way. We have listed down seven books that Warren Buffett says are a must read for every investor here.
Buffett has developed an expertise in looking for quality and fundamentally rich businesses. He selects companies solely based on their overall potential.
He places a great deal of importance on investing in companies having an economic moat. These are companies with an advantage, legal or operational which prevents competitors from entering and affecting margins of the business.
There is an ocean of wisdom with this billionaire investor. Few things that I would love my readers to inculcate in their investment philosophy is –
- Start investing as early as you can.
- Always invest in wonderful businesses with an economic moat
- Invest in your circle of competence
- Invest for the long term.
This will help you start your wealth compounding journey in the right direction.
If you start investing Rs. 1,000 today, every month, for the next 40 years, you will be able to create a wealth of approximately Rs. 72,788,853.
How did I calculate that? How can your monthly investment give you a return in lakhs?
Warren Buffett made the best of this secret. It is your turn now!
Read what is the power of compounding and how Warren Buffett compounded his wealth over all these years.
The best investment approach is to buy quality stocks after analysing the company’s fundamental aspects.
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