Warren Buffett's Investment Philosophy

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Billionaire Warren Buffett’s investment philosophy is anything but typical. Known as one of the greatest investors in the world, the frugal philanthropist has often done things his own way. His down to earth style is reflected in his investment approach, as well as in the way he lives the rest of his life.

Buffett’s unique approach to investing can be described by the following attributes.

Value Investing

Simply put, Buffett looks for deals. When purchasing stock, Buffett looks for shares that are less than it seems the market should bear. This approach to investing is called value investing, and was a method advocated by Benjamin Graham, one of Buffett’s earliest influences and mentors.

Deals Not Yet Recognized by the Market

Value investors, like Buffett, are the bargain shoppers of the stock world. Buffett looks for stocks that appear to have great potential, but are still undervalued by the market and therefore underpriced. However, Buffett is less concerned with whether the stock market will eventually drive the worth of these investments up and more concerned with the inherent worth of these investments.

Emphasis on the Company Rather than Perceived Market Worth

When Buffett chooses a stock, he cares little about the effect of the stock market on the future value of the investment. Buffett is interested in the intrinsic value of the investment, and to determine that value, he studies the company. Rather than focusing on market trends, Buffett studies company fundamentals.

Long Term Ownership in Quality Companies – Buffett’s Criteria

Buffett’s stocks are picked with company ownership in mind. Buffett considers several indicators of a healthy company. Is the company providing a healthy return on investment for investors? Is the ratio of debt to equity for the company low? Are profit margins on the rise? Has the company been in business and public for at least 10 years? Does the company offer a product that its competitors cannot replicate?

The Key – Determining Whether Stock is Undervalued

Key to Buffett’s strategy is determining whether a good stock is undervalued by 25 percent. Once Buffet has analyzed the company fundamentals, he compares his determination of the company’s intrinsic value with the company’s actual current market worth. If Buffett determines that the company’s intrinsic value is at least 25 percent greater than the company’s actual worth, then the stock is considered a good value.

Buffett’s phenomenal success is largely due to his determination of a company’s intrinsic value. Intrinsic value is difficult to measure and few have succeeded in replicating Buffett’s success.

Investing Rather than Speculating

Buffett considers his approach investing, rather than speculating, and makes a distinction between the two. Speculating focuses on what someone will pay for an investment in the future. Investing, as Buffett defines it, focuses on what the investment will produce. Buffett concentrates on his definition of investment, always shaping his strategy by the worth of the investment.

Researching and Taking Time

Unlike investors who buy and sell quickly, Buffett takes his time researching stock. Buffett is not concerned with the daily fluctuations of the market. He prefers to take a long term approach, holding onto carefully selected investments and backing his buying and selling timing with detailed research.

Never Borrow Money

Buffett claims to have never have permanently lost more than 2 percent of personal worth in an investment position. To that end, he advocates never borrowing money to make an investment. In a market fluctuation, losses could deplete your worth.

Concentration for Experts; Diversification for the Average Investor with Little Time

According to Buffett, if you’re an expert or professional investor, with plenty of time to study markets and companies, then concentrate your investing in selected positions. If you’re an average person with an hour or less to devote to investing on a weekly basis, Buffett recommends investing in an index fund using dollar cost averaging (investing a set amount, regularly, over a long period of time). Buffett and his partner generally invest in five positions at any time.

Buffett has stated that his approach is not for everyone. It doesn’t provide the instant excitement of trying to guess daily stock trends; it doesn’t promise getting rich quickly. Buffett’s approach requires patience, study, and has potential for success over time.

 
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