Warren Buffet, the “Oracle of Omaha" needs no introduction. Being the world’s greatest investor comes with a reputation of its own, after all.
"Rule 1: ever lose money.”
“Rule 2: Never forget Rule 1.”
The CEO of Berkshire Hathaway is regarded as a living legend. As of now, he has amassed a net worth of $102.8 crores, which makes him one of the wealthiest people in the world.
Warren Buffett and his investing principles have been the subject of immense interest for investors and analysts across the world.
Well, that’s rather obvious, isn’t it?
Who wouldn’t want to learn from the Oracle himself?
Who wouldn’t also want to amass a personal wealth that is even a fraction of Buffett’s?
That, my dear friends, is where I come in.
I am going to take this opportunity to tell you about the three main investing principles that Warren Buffett lives by. After all, if they worked for him, they could probably work for you too.
Let’s get started then, shall we?
The first principle is perhaps the most basic as well as the most universal.
Invest in what you understand
“Buy a stock the way you would buy a house. Understand it and like it such that you’d be content to own it in the absence of any market.”
For any potential investor out there, especially any long-term ones, the first step is to select which company you would like to invest in. While making this selection, it is imperative to do your own research and find out whether the company’s business plans and projected growth fit in with your own investment goals.
The process of evaluating a company would be challenging and unnecessary difficult if you knew nothing about the industry or the company, wouldn’t it?
The advantage of investing in businesses you understand is fairly self-explanatory. Not only would it be easier to research the company, but you would also be able to follow the current market trends relating to that industry, with little additional effort.
If you study Warren Buffett’s investment portfolio, you will notice the fact that technology companies are almost entirely absent from purview. This may seem somewhat strange and come off as a missed opportunity. In fact, Buffett was approached by Google prior to its IPO and he turned them down.
This is, however, entirely compatible with Buffett’s foremost investing principle. He only sticks to those companies and those industries that he fully understands. After all, how can one invest in a company when one doesn’t comprehend how the company would stay profitable?
Be warned, many potential investors have fallen prey to the dangers of chasing novelties.
There is always at least one new industry that suddenly flames across the investment horizon like a meteor and dazzles everyone with its shining prowess.
Such phenomena are generally transitory, and such companies often fizzle out into the darkness in the blink of an eye.
The second principle defines Warren Buffett’s style of investing.
Invest in companies with favourable long-term prospects
“Our favourite holding period is forever”.
Imagine the company you want to invest in, as a castle. Buffett describes an “economic moat” around the castle/business which is absolutely paramount for protection.
What does this mean?
An economic moat can be translated into anything that will allow the company to retain a competitive advantage in the long run. In other words, the company should have an iron-clad plan for the future, to ensure the same or a higher rate of growth persists.
As potential investors, you need to study the company’s growth plans for the future. Otherwise, what would be the point of investing in a company that cannot defend its own position in the market?
He further elaborated on this point and said, “A moat that must be continuously rebuilt will eventually be no moat at all”.
This idea or principle seems ridiculously obvious, doesn’t it?
However, most investors are generally wowed by sudden spurts of growth in companies and spend their hard-earned money on shares without even considering what the long-term implications of their decision will be.
Any company would look attractive at its peak. It would be advisable to not be seduced by the one-dimensional face value. You have to check whether the company will survive in the long run, whether your investment will pay off in the future.
Let’s move on then, shall we?
The third principle is pure genius.
Invest in quality companies when they are marked down
“Whether we are talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Buffett adopted this principle from investor and mentor Benjamin Graham, who had a huge influence on him. This is centred on the concept of value investing.
“Price is what you pay; value is what you get.”
Now, Buffett generally buys the entire company or enough to put him on the boards of the companies. The purchase decision, however, comes down to the price tag of the company. This principle also applies to normal investors, who would buy maybe a few hundred shares instead of a few thousand.
You see, fluctuations are commonplace in the stock market. Even though the stock prices change instantaneously, the intrinsic value of the company does not change as often. Smart investors always buy quality stocks when they are undervalued.
Buffett swears by his buy-and-hold philosophy. I think any potential investors out there should do the same. Good businesses always bounce back in the market. If the foundation is strong, the stock prices will eventually reflect it.
If you need any more conclusive proof of this fact, let us revert back to the age-old story of the race between the hare and the tortoise. The hare used sudden bursts of speed to get ahead in the beginning. However, he was lazy and his lacklustre performance in the rest of the race really let him down. The tortoise, on the other hand, kept advancing at a steady and unmitigated pace. The tortoise worked hard and eventually persevered.
Any good company would be like the tortoise. So if you find the company of your choice is not doing well in spite of having a good reputation, Buffett would tell you it is just a rough patch. Good companies are never worth parting with. They always pay off in the end.
Well, guys, that is all I had to tell you about Warren Buffett’s main investment principles. But, if you wish to explore more about this topic, click here to view an elaborative video on his investing principles on our YouTube channel
Warren Buffett is an undeniable genius and is worth learning from. His principles and his core beliefs about investing are well-grounded and very practical. So if you intend to try your own hand at investing, follow the master.
Happy investing!
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