Warren Buffet’s shares Investment strategy

Warren Buffet and his company Berkshire Hathaway  have been successful investing in shares for over 50  years. His investments made him one of the richest people on the planet. According to business magazine Forbes, in 2019 Warren Buffet's capital was a whopping $85.9 billion. Therefore, it is not surprising that many investors would like to learn Warren Buffet's investment strategy. In this article we will discuss how Warren Buffet got so rich.

What would you want to know about Warren Buffett?

Who is Warren Buffett?

Warren Buffet is my personal hero. This American investor is enormously successful. He is the major shareholder of the investment company Berkshire Hathaway. If you had only invested $1,000 in this company in the 1960s, you would have had over ten million dollars today!

The great thing about Warren Buffett is that, despite his enormous success, he has remained very down-to-earth. His personal wealth is estimated at over $40 billion, yet he still lives in the first house he ever bought for $31,500 in Omaha.

He bought his first share at age 11. When he was 13, he filed his first tax return. Since 2010, he has been committed to the Giving Pledge,  asking other millionaires to give half of their wealth to charity.

Home warren Buffet

Warren Buffet's very modest home

Graham as Buffett's teacher

No baby is born a genius investor. Buffett got a lot of his stock market wisdom from Graham. When he was young, he worked in Graham's company. But what exactly did he learn from Graham?

Both investors believe that you only buy shares when the intrinsic value of the company exceeds the value on the market. Therefore, they don't look for speculative shares that can make a huge amount in one fell swoop. The focus is rather on looking for shares that are undervalued.

Buffett learned from Graham to be very patient. It is important to study the company you want to buy. And it is even more important to only take the next step when there is a good reason for doing so. The best investors are very patient and sometimes do nothing for years. This method of investing is also called value investing.

Still, Buffett has further optimized Graham's strategy. Buffett never actually aims to sell the shares of the companies he invests in. Graham regularly sold his share with a profit in order to look for new investment opportunities. Buffett is however really looking for companies that he fully trusts and when he does he holds on to the shares. As long as he thinks the company has a good vision for the future, he won't just sell the stock.

Warren Buffet investing

Which stocks should you buy according to Warren Buffett?

Buffett has several rules he uses to determine whether you should buy a share. These are the rules Buffett applies when he considers buying a stock:

  • Invest in shares that are predictable. When the future of a company is uncertain, it's better not to acquire shares in it.
  • Invest in businesses you understand. Buffett prefers to invest in ice cream rather than complex technology companies.
  • Do not invest in shares with large research or capital costs. The future prospects op these companies are too uncertain according to Warren Buffett.
  • Buy shares in companies that can absorb increases in costs with higher profit margins. To do this, the company must be able to raise prices.
  • Warren Buffett invests only in companies with a strong and stable management team.

Furthermore, Warren Buffett has some specific rules. For example, he will sell his shares when a company has a negative cash flows or when high levels of investments are needed to remain profitable.

When a company buys its own shares, he views this as a positive signal. After all, a company will only do this when it has confidence in the future. The company also clearly believes that the shares are underpriced. And who has a better idea of what's going on within the company than its management?

Selection criteria

When Warren Buffet prepares to make a new investment, he utilizes fundamental analysis. Fundamental analysis looks at a company’s figures and growth potential. Below we cover the criteria he uses to rate a share:

  • The stock must have positive earnings per share
  • Profits must have grown slow and steady over the past 10 years
  • The long-term debt is ideally below 2X earnings and never more than 5X earnings
  • The return on total assets is 12%
  • The ROE (return on equity) is 15%
  • The company's free cash flow is positive
  • The company should not be dependent on large capital expenditures

Warren Buffet’s strategy

According to the investor himself, you do not need an exceptional IQ to be successful with stock investments. What you do need is a plan of action. It is important that your plan is not affected by your emotions. For that reason, Warren Buffet's investment strategy consists of a number of fundamental concepts. On this page we discuss some of them.

Invest in yourself too

You are not going to suddenly wake up rich. You need a good plan and a sound mindset to get results. To achieve your goals, you will have to keep learning. You do this through practice and by constantly striving to improve your results.

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Compounding

Another important aspect of Buffet's strategy is the so-called snowball effect. His quote sums this up nicely: 'Life is like a snowball. The important thing is finding wet snow and a really long hill.’  When you start off with a snowflake, you will have a snowball at the end of the ride. That is also how investing work.

Any small investment can grow into a large one given enough time. This is because you also receive interest on interest. When you reinvest returns, your total investments grow exponentially. For that reason, it is wise to invest a fixed amount every month. Every bit can help you achieve your ultimate goal.

Diversifying investments

It can happen that a sector suddenly performs less well. Warren Buffet stresses that it is important to spread your investments as much as possible. This way, your loss in one sector or region can be absorbed by a success in another sector or region.

When you want to achieve good results, it is important to buy shares in companies across different countries. After all, countries can introduce unfavourable legislation that makes companies less well off. Also, one country's economy can collapse while another country's economy flourishes.

But with that your strategy is not yet complete. It is also important to spread your investments across different sectors. After all, the banking sector could be performing poorly in the coming years, while the tourism sector performs optimally. By diversifying your investments across different sectors, you ensure that you are not vulnerable to problems with one type of company.

Warren Buffett advises many novice investors to invest in an index fund. After all, with an index fund you benefit from maximum diversification. Even with smaller amounts, you can invest in different regions and sectors. Do you want to know where you can invest in index funds? Use the button below to compare the best brokers:

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See stocks for what they are

In Warren Buffet's investment strategy, he first of all wants people to understand what stocks are before they buy them. A share is in fact a part of a company that you can buy. It is also necessary to determine what kinds of companies will continue to grow in the long term. These are the types of companies that Warren Buffet would like to buy shares of. 

Only invest in things that you understand

If a company is active in a business that you do not understand, it is not smart to invest in it. Warren Buffet recommends to only invest in things you understand. 

In the time leading to the financial crisis of 2008, a lot of people invested in complex financial bonds. Many people invested their savings to be able to enjoy these returns without understanding exactly what they had invested in. We now know that these products were mortgages and loans that were resold several times and could never be redeemed by the borrowers. This was the cause of the last financial crisis in which many people lost their invested savings.

Invest for the long term

Warren Buffet is a great advocate for investing in the long term. When he buys stocks, he plans to keep them for a long time. He therefore only invests in strong companies with a good future perspective. Investing in the long-term means that you will not suddenly start selling the stocks if the price suddenly drops.

After all, this investment strategy is based on the idea that sudden drops and increases will automatically correct themselves over time. In the long term, the company invested in will grow and the return will increase with it.

Avoiding unnecessary costs

Another investment tip from Warren Buffet is to avoid unnecessary costs. However, the definition of unnecessary costs is rather vague. An example of unnecessary costs is racking up expenses with a credit card. Spending money you don't actually have is never a good idea.

When you start investing, you have to eliminate costs as much as possible. When the costs on your investment account are high, you get a much lower return. We've listed the cheapest brokers for you so you can learn how to avoid unnecessary costs. Use the button below for personal advice:

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Buy your shares at the right time

According to Warren Buffet, investors should not fear sudden declines in the stock price. On the contrary, as an investor you should welcome them. After all, it is the right time to buy shares of a particular company. Buy your shares if the price is lower than the value of the company and take your profit over the long term.

Based on the aforementioned guidelines, Warren Buffet has several strong companies in mind in which he wants to invest. With his strategy, however, he does not immediately buy the shares of these companies. In order to make as much profit as possible, he has to wait for the moment that the price reaches an attractive level

What are good books about Warren Buffett?

Several books have been written about my personal hero. A great book to read is 'The Snowball' by Alice Schroeder. This book clearly describes Buffett's investment philosophy and investment strategy. The advice can easily be applied to your investments.

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