It's common knowledge that Warren Buffett is usually lucky with his investments. But what do we know about him? Maybe he was born with a "silver spoon in his mouth"? But how does the stock market guru choose these promising stocks, thanks to which he became the seventh in the top ten richest people in the world, with a net worth of $115.6 billion?
Biography of Warren Buffett
Warren Buffett was born on August 30, 1930, and spent his childhood in Omaha, Nebraska, where he still lives. His father was a stockbroker and suffered greatly from the Great Depression that began in 1929. Later, he was a Republican congressman, which caused Warren to leave his beloved Omaha for a while. He was survived by two sisters who had a difficult childhood with him because of their rather callous mother. There are various stories about his childhood, some of which are more like fables. But many claim that he was probably a man of numbers and commerce from infancy. The boy bought six-packs of Coke and then sold them individually to make a profit. Then he delivered newspapers, which also explains his passion for publishing. Unicum filed his first tax return at the age of 14, declaring what you would think? Expenses for repairing a watch and an old bicycle.
Then came the tumultuous years of business education at Columbia University in New York. He studied under none other than Benjamin Graham himself—the “godfather of value investing” and co-author of the classic investment books “Security Analysis” and “The Intelligent Investor.” He later worked for Graham as well, though Graham initially gave him a kick. Graham’s preferred investment style, like the kick, also shaped his path over the years and was one of the reasons he eventually became involved with the New England textile company Berkshire Hathaway.
Buffett continued his career at the investment company that bears his name, and then, after its collapse, at Berkshire as his main investment vehicle. This shows that he is not the Lord God of the financial world, and his affairs are not always "a field of dandelions". Among other things, he served as interim CEO at the financial institution Salomon Brothers to save it from bankruptcy. After all, it was something of a premonition of the "fall of Lehman Brothers", which was to happen in a few years. Well, as always, the rest is history.
Even in his old age, Buffett still aspires to complete his life's work at Berkshire and pass on his knowledge to other investors. Even despite today's financial crisis, Berkshire's Class A shares, worth more than $681 per share, are currently the most expensive in the world.
Berkshire Hathaway Investment Strategy
He prefers undervalued stocks and patience. The chairman and CEO of Omaha-based investment company Berkshire Hathaway is not without reason considered one of the most successful investors of all time. The secret of his success is based on a value strategy: focusing on fairly “boring” investments and being patient. Warren Buffett’s financial advice at first glance seems extremely simple — “The fundamentals will not change. You will not discover anything new in investing for the next 50 or 100 years.” Buffett’s strategy is based on choosing companies that consistently make money and are not threatened by economic crises. Therefore, the investor prefers to buy undervalued stocks of strong companies and hold them for the long term.
The basic idea: Cheaper stocks usually yield higher returns than more expensive ones. The legend is not fazed by the daily fluctuations of the stock markets. “Stocks are simple. You just buy shares of a great company with a management team of the highest level of integrity and ability at a price below their intrinsic value. And then you hold those shares forever,” Buffett once explained.
The star investor has proven time and again that he has a very good instinct for long-term investments. That's why he deviates from his investment strategy from time to time and has also focused on a few growth stocks in recent years. During this time, for example, he has bought shares in Apple, Snowflake and Amazon: "I've been watching Amazon since the beginning," Buffett explained.
Warren Buffett's Success Secrets
However, tech stocks, startups, or other growth stocks are not usually on the stock market guru's buy list. Buffett often emphasizes that growth-oriented tech companies are not part of his core competency (circle of expertise), and that the ups and downs in this sector are very fast and unpredictable from today's perspective. But which companies could be considered potential investments for Warren Buffett?
When making such a decision, Buffett takes into account several key considerations and gives importance to the performance of a wide range of criteria. The “Buffett Method” seems simple enough at first glance, as it includes questions such as the degree to which management is guided by the interests of shareholders, Investor's Business Daily reports. However, it becomes more complicated when it comes to execution, as the answers to such questions require a wide range of key indicators and skills. If everything were that simple, there would probably be no place to put successful investors.
Staying within your “circle of competence”
One of Buffett's main considerations is the business model. The billionaire invests exclusively in companies whose businesses he knows, understands and can analyze, that is, in sectors of the economy that belong to his "circle of competence". This is, in particular, the financial sector: Buffett prefers banks and insurance companies
Before delving into the market, the economy, or general sentiment, Berkshire's CEO first analyzes the business model. To do this, he looks at the development of the business over the past decade and then makes a forecast for the future development of the company, in accordance with the motto "think long term." While a strong market position is also important, the business model takes center stage.
The importance of company management and key figures
Buffett also evaluates the quality of management: whether it makes rational investment decisions, whether management focuses exclusively on turnover, size, and volume, or whether it attaches importance to profitability in the long term.
Key financial metrics also play a crucial role in the billionaire's investment strategy. "Find companies that have stood the test of time" is Buffett's motto. He places particular importance on return on equity. He is interested in whether a company has consistently performed well compared to other companies in the same industry over the past five to ten years. The level of debt is another important characteristic that Buffett carefully studies in advance. The famous investor has also established his own key metric: owner income. He looks at whether owners get their capital back.
Buffett also believes that a unique selling proposition, or “moat,” as he calls it, and a well-known, established brand are very important. The deeper the “moat,” the harder it is for competitors to gain market share. Buffett also tends to look at companies that have been in business for at least a decade. A good example of brand relevance is Coca-Cola. The stock market legend invested in the beverage brand early on, and it is heavily represented in his portfolio. “I’m one-quarter Coca-Cola,” Buffett, who is particularly fond of Cherry Coke, once joked.
Meanwhile, he also counts Apple among the companies with a large “moat”: the corporation has immense popularity among its millions of loyal customers who are willing to spend big money on iPhones, iPads, MacBooks and similar products every year. Apple fans remain loyal to the company even during recessions, which makes the technology company’s business model very resilient. Buffett believes in Apple so much that the Californian iPhone maker is now the largest holding in Berkshire Hathaway’s portfolio.
The special skill of a stock market legend
Perhaps the most important question Buffett asks himself about a potential investment is whether it is a good value? To decide whether a stock is undervalued, Buffett must determine the intrinsic value of the company. This is perhaps one of the most difficult parts of the strategy. Buffett looks at various fundamentals of the company, such as sales, earnings, and assets. Once he has determined the intrinsic value, he compares it to the company's current market capitalization: If Buffett's calculated value is at least 25 percent higher than the current value, an investor considers the company a promising investment, according to Investopedia.
The best books about Warren Buffett
There are many books about Buffett's investment style, his life story, etc. But there are a few that are considered must-reads for anyone who wants to learn more about how Buffett became the leading investor of all time.
- "Buffett: The Story of an American Capitalist" by Roger Lowenstein. This is probably the best biography of Buffett ever written, first published in 1995.
- The Warren Buffett Way by Robert G. Hagstrom. This is the best book that describes Buffett's investment strategies. Hagstrom talks about how Buffett approaches business valuation, fixed income investments, stocks, and more. While Buffett himself often cites Benjamin Graham's books as the best books on investing, there is no better book to learn how Buffett applies his investment philosophy than this one.
- "CEO Warren Buffett" by Robert P. Miles. This book is not about Buffett's life or his investing style. Instead, "CEO Warren Buffett" delves deep into the management behind Berkshire Hathaway's enormous success.
- “The Snowball: Warren Buffett and the Business of a Lifetime” by Alice Schroeder. Among biographies, Schroeder’s book follows hot on the heels of the first book on this list. But the two books are so different that they’re both worth reading.
- "Tapping at Work: Warren Buffett on Almost Everything, 1966-2013," by Carol J. This book is actually a collection of articles about Buffett from Fortune magazine that were published back in 1966, just a few years after Buffett took over the struggling textile company Berkshire Hathaway.
Conclusion
However, these are just some of the criteria and considerations that the stock market legend uses when choosing stocks. Buffett's investment approach goes much further. How Buffett actually determines the intrinsic value of a company remains his secret, a skill that has made him arguably the most successful investor of all time and people, and which not everyone, with a little basic knowledge and skills, can imitate.
