Warren Buffett Investing Philosophy
Value-based investing guru Warren Buffett has long believed people should only buy stocks from companies with sound fundamentals, strong earnings power, and a growth potential that can be sustained.
Despite their simplicity, detecting these concepts isn’t always straightforward. Fortunately, Buffetthas developed a set of principles that can help other investors implement his investment philosophy effectively.
Here, we take a deeper look into how Buffett made his money and explore his investing philosophy in more detail.
Start Investing in Stocks now with eToro!Who Is Warren Buffett?
Warren Buffett is a well-known and highly respected businessman, philanthropist, and investor. He was born in Omaha, Nebraska in 1930.
Young Buffett , just nine years old, often visited his father's brokerage shop, and he charted stock performance, giving him an early, close-up look at the stock market.
He bought his first stock at 11 and published his own horse-racing tip sheet at 13.
Buffett graduated from the University of Nebraska with a bachelor's degree. Upon graduating from Columbia University in 1951, he earned a master's degree in economics.
Buffett is the chairman of Berkshire Hathaway and its largest shareholder. Since 1965, the investment group has delivered a compounded annual market value increase of 20%. Company assets include Geico, Clayton Homes, Dairy Queen, Coca-Cola, and American Express. It is based in Omaha, Nebraska. Warren Buffett is currently ranked eighth on the Forbes 400 list of 2021 and fifth on Forbes' 2023 billionaires list.
How Did Warren Buffett Make His Money?
Since Buffett has amassed so much wealth through his holding company Berkshire Hathaway, investors are paying attention to his stock picks. Known as a value investor, he searches for securities with low intrinsic value prices.
In most cases, this value is determined by analyzing a company's fundamentals. He has succeeded by assessing a company's performance, debt, and profit margins, among other things. Also, he tends to hold on to high-performing stocks for long periods of time.
Warren Buffett's Net Worth
Warren Buffett started investing seriously when he was 10 years old. Inflation-adjusted, he had a net worth of $9.3 million by the time he was 30. It was in 1983, when he made his first Forbes list, with a personal net worth of $620 million.
Today, Buffett’s net wealth exceeds $100 billion. That makes him the fifth-richest person in the world.
Berkshire Hathaway stocks account for virtually all of Buffett's wealth. In comparison to the S&P 500, his shares have returned 10.5% per year since he took control of the company in 1965.
Warren Buffett Portfolio
Below is Warren Buffet’s current portfolio (last updated June, 30, 2023):
AAPL - Apple Inc.
BAC - Bank of America Corp.
KO - Coca Cola Co.
CVX - Chevron Corp.
AXP - American Express
KHC - Kraft Heinz Co.
OXY - Occidental Petroleum
MCO - Moody's Corp.
USB - U.S. Bancorp.
ATVI - Activision Blizzard Inc.
HPQ - HP Inc.
BK - Bank of New York Mellon Corp.
DVA - DaVita HealthCare Partners
C - Citigroup Inc.
KR - Kroger Co
VRSN - Verisign Inc.
PARA - Paramount Global CL B
CHTR - Charter Communications
GM - General Motors
V - Visa Inc.
LSXMK - Liberty SiriusXM Series C
MA - Mastercard Inc.
AON - Aon Plc
AMZN - Amazon.com Inc.
CE - Celanese Corp.
MCK - McKesson Corp.
ALLY - Ally Financial Inc.
SNOW - Snowflake Inc
LSXMA - Liberty Sirius XM Series
TMUS - T-Mobile US Inc.
GL - Globe Life Inc.
MKL - Markel Corp.
FWONK - Liberty Media Corp Formula One Series C
RH - RH
NU - Nu Holdings Ltd
FND - Floor & Decor Holdings
STOR - STORE Capital Corp.
STNE - StoneCo Ltd.
JNJ - Johnson & Johnson
MMC - Marsh & McLennan
PG - Procter & Gamble
LILA - Liberty LiLAC Group A
MDLZ - Mondelez International
LILAK - Liberty LiLAC Group C
SPY - SPDR S&P 500 ETF Trust
UPS - United Parcel Service
VOO - Vanguard S&P 500 ETF
What is Warren Buffett's Strategy?
Buffett invests according to Benjamin Graham's value investing philosophy. The goal of value investors is to find securities with unjustifiably low prices relative to their intrinsic value. Analysis of a company's fundamentals is the most common method of estimating its intrinsic value.
Value investors look for stocks that are undervalued by the market, or stocks that are valuable but not recognized by the majority of buyers.
Buffett takes the value investing approach to another level. A large number of value investors don’t believe in the efficient market hypothesis (EMH). According to this theory, stocks always trade at their fair value, preventing investors from buying or selling undervalued or inflated stocks. Their belief is that the market will eventually favor undervalued quality stocks over time.
However, the stock market's supply and demand intricacies don’t concern Buffett. As a matter of fact, he doesn't pay much attention to the stock market.
When Buffett invests in a company, he doesn't worry about whether it will be recognized by the market at some point. Instead, he’s more concerned about how well that company will make money.
Furthermore, he assesses how likely it is for a transaction to lose capital when backing strong and diligent managers, and when determining the intrinsic value of a deal. In his view, the business can be liquidated for the discounted value of its remaining cash. As part of this calculation, he uses a cash figure he defines as "owner earnings."
The Buffett method also involves examining all costs, not just those considered accounting expenses, to determine long-term economic value. In his opinion, mark-to-market practices distract from the bottom line by increasing volatility.
An investor must, however, invest only in companies that aren’t overly complicated in order to estimate intrinsic value.
Richest Forex Traders in the World - What Are Their Secrets?Warren Buffett's Advice for Beginners
1. There Are Times When Diversification Isn't a Good Idea
Diversification is highly recommended by many successful investors. Warren Buffett, however, tends to disagree.
According to Buffett, diversification is for beginners. In order to make successful investments, an experienced investor should choose stocks that will last over the long run and be confident in their strategies.
As a result of diversifying their portfolios, some investors worry that any single stock might sink their entire portfolio. However, doing so makes it more difficult to keep track of current events.
They reduce volatility by diversifying, but they also reduce their focus on individual investments at the same time. Whenever Buffett sees an opportunity to buy good stocks, he takes advantage of it.
2. Start By Investing in Yourself
Buffett believes that investing in your own abilities is the best investment you can make. If you can develop your skills or business, you'll likely be more productive.
Stocks aren't going to make most people rich. It's going to be their careers that make them rich. Therefore, you should put yourself first.
3. Investing Success Comes from Trusting Yourself
According to Buffett, the hardest thing about investing is trusting your judgment. There is always a sense that others are right and you’re wrong. The best thing you can do is study and believe in your abilities.
To be successful, you must overcome fear and not listen to others. Make your own investment decisions and gain knowledge to stand apart from the crowd.
4. Put Your Money Into Investments You Understand
Buffett says people tend to think quite a bit before investing—sometimes too much. Never invest in a business you do not fully understand, he warns.
His advice is to understand how a company makes money and the key drivers affecting the company's industry before investing in its stock. If it takes longer than 10 minutes to understand a company’s business model, he moves on to evaluating another company.
The majority of people aren't capable of predicting whether a business will be successful in the market. No matter how much data you have, you can never predict the future with 100% accuracy.
Buffett advises investors not to invest in situations requiring accurate forecasts. If the idea seems complex to you, try investing in other businesses instead.
Buffett says that before even considering valuation, Buffett would only invest in a few hundred publicly traded companies out of about 10,000+.
5. Pick the Right News to Focus On
Warren Buffett advises investors not to put too much stock in every news headline.
Buffett adheres to the 99-1 rule. The majority of investors make their investment decisions based on 1% of the financial news they consume. As a result, they sell their stocks whenever bad news breaks - e.g. a company's revenues have declined by 10%.
In the case of this particular company, Buffett says it would definitely be able to withstand such events if it had been around for, say, 100 years. Basically, people overreact often and make rash decisions due to fear.
6. Buying a Stock of a Company Means Buying a Piece of That Company
Take the example of owning a convenience store near your house. You'll automatically consider the competition, suppliers, and prices. You must consider both the market position and the specific location of the business.
In the same way, when buying stocks, you should consider all these factors - just as the business owner does.
Stocks aren't just pieces of paper or symbols. When you buy stocks in a company, you are buying a stake in the company.
7. Embrace Your Mistakes and Move Forward
Many people would be surprised to hear that even Warren Buffett makes mistakes - and sometimes very big ones. Despite his mistakes, he makes sure to learn from them.
In order to avoid repeating the same mistakes, Buffett recommends keeping a record of the mistakes you've made.
Further, Buffett suggests that you teach these lessons to your children and grandchildren in order to prevent them from making the same mistakes as you.
8. Avoid Day Trading
According to Buffett, buying stocks and forgetting about them is the key to a better return on investment. His investment philosophy is to buy and hold stocks for decades.
This is based on two principles:
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Stocks will eventually converge with their intrinsic value if you buy them for less than their true value.
-
As you hold onto a great business, its value increases exponentially over time.
Holding on to stocks for a longer period of time will ultimately benefit the patient investor. In Buffett's view, time is the friend of a successful business.
To learn more about Warren Buffet’s mindset when it comes to investing and money management, feel free to read some of the books he’s recommended (Note: He hasn’t written any of his own books). To learn about investing, Buffett has recommended Security Analysis by Benjamin Graham, The Intelligent Investor by Benjamin Graham, Mitek: A Global Success Story, 1981-2011 by Jim Healy, and Supermoney by Adam Smith.
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Summary
Warren Buffet’s value investing philosophy has no doubt resulted in his exponential financial success. Buffett's investing style is similar to a bargain hunter's shopping style. Despite its simplicity, it reflects a practical and down-to-earth outlook. His attitude extends to other aspects of his life, too. He doesn’t live in a big home, collect cars, or travel to work in a limousine. Though value investing has its critics, whether you're in favor of Buffett or not, the results speak for themselves.
However, applying these tenets can be challenging, given the amount of data and metrics to be cultivated and calculated. Those who are able to successfully employ these analytical tools will have the opportunity to invest like Buffett and see their portfolios flourish.
FAQs
What companies does Warren Buffett own?
As chairman of Berkshire Hathaway, Buffett owns a number of companies, including Geico, battery maker Duracell and restaurant chain Dairy Queen.
How old was Warren Buffett when he became a millionaire?
He had a net worth of $20,000 at the age of 21. He became a millionaire at the age of 13 and a billionaire at the age of 55 after.
How does Warren Buffett pick stocks?
His decision to invest in stocks is solely based on the overall potential as a company. Buffett invests in quality companies that are capable of generating earnings over the long run, not for capital gains.
What is Warren Buffett's net worth today?
Currently, Buffett is worth over $103 billion.
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