The Oracle of Omaha, aka Warren Buffett, is considered to be one of the greatest investors of all time. It's no wonder people want to know how he does it. Are you wanting to learn how to invest like Warren Buffett?
There have been many books written about Warren Buffet that illustrate his investment strategies in great depth. One of them is Buffettology, written by Mary Buffet who was formerly part of the Buffett family. Her book illustrates many of Buffett's investing strategies that can only be known by being a member of the family and hearing it from The Oracle himself.
Here are 10 investment strategies used by Warren Buffet and based on the book, Buffettology.
10 Strategies To Invest Like Warren Buffett
This list could be endless. These strategies are unique because they aren't all directly found in Buffett's shareholders letters. Instead, they are explained in depth by a former family member who learned it directly from Buffett himself.
1. Invest in Companies for The Long Term
You might be familiar with the famous quote by Buffet:
“If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”Warren Buffett
This is later explained in Buffettology illustrating that Warren Buffet doesn't trade stocks day in and day out. Instead, he looks for companies who will be around for a long time and plans on holding long positions in those companies for years to come.
2. Invest in Companies Whose Earnings Are Predictable
Predictable companies are ones who have predictable earnings forecasts, and don't deviate from their plans. For example, if a company anticipates earning $1.10 per share this upcoming quarter, Buffett wants to be sure they are reliable and can be trusted.
Some companies, particularly newer companies, have earnings quarter after quarter that are all over the chart. Some quarters they hit their target earnings, others they miss. Warren Buffett looks for companies whose earnings have a history of meeting or exceeding earnings expectations and have a steady upward trend in their earnings growth.
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3. The Price You Pay Will Determine the Expected Return
When grocery shopping or shopping at retail outlets, it's always smarter to look for the items that are on sale. Why? Because you get more value out of the item you purchase than the monetary price you pay.
An example used in Buffettology is a boy who is seeking to find a girlfriend. He scopes out some prospects and narrows it down to his favorite. He doesn't go and ask her out immediately but waits until after she has just broken up with her boyfriend.
When investing, this means finding great companies to buy, analyzing their financials, then waiting until the price is right. When the price drops to the point that you can realistically achieve your target return, you buy in.
4. Invest in Businesses Who Have an Identifiable Industry Moat
What is a moat? Consider a large castle with a pond that goes all the way around the perimeter, and it's filled with alligators. No one is getting in but through the castle's draw bridge. This is called a moat.
Companies who have an identifiable industry moat make for great investment opportunities. Examples of an industry moat are:
- The company's product is so good that it is difficult for customers to ever live in a world without it. (Apple, Amazon, Walmart, Microsoft, etc.)
- The industry in which the company operates has major barriers of entry, making it difficult for other companies to come in and compete. This could be anything from major technology barriers, regulation barriers, down to cost of entry barriers. Companies who already dominate industries with big entry barriers have a huge advantage over potential competition.
- The company's product or service is an essential tool used by people every day, making it difficult for competition to come in and take over. Examples of this could be companies like Johnson & Johnson who provide necessary household products, or even Google whose search engine dominates the global search and even earned itself its own verb: “Just ‘Google' it…”
5. High Return on Equity Is A Must
Say a company can take your $10,000 and turn it into $12,000 in one year, or a yearly return of 20%. Would it make sense for that company to take the earnings of $2,000 and give it back to you in dividends or perhaps invest it in other enterprises make sense? Or would it be a better idea to invest that money back into their company with another expected 20% annual return?
The latter of course! High return on equity means a company is using your invested dollars wisely and growing it rapidly.
6. Look for Companies Who Sell Repetitive Products or Services
How many of us could imagine living in a world without Coca-Cola? I sure couldn't! The great thing about this company, is that it is in the hands of nearly the entire world every day, and its consumable so customers have to come back and buy more!
Companies with this type of market share who have consumable products that require customers to come back for more are excellent investment opportunities.
7. Growing Earnings Per Share Is A Good Sign
Let's say a company that has a stock price of $100 with an earnings per share (EPS) of $10. That's an EPS of 10% for that year. But if that EPS is growing at a 25% growth rate, that means your EPS will double in 4 years, or it will be $20 per $100 of stock.
Now, sure the stock price 4 years later is likely to be different than what it was during year one, but the concept is still the same. If its earnings are growing at 25% per year, your earnings per share of stock you own will have doubled after four years. Sound like a good investment? Absolutely!
8. Ignore the Hype on Bear/Bull Market News
Nobody can predict the market, and thus the hype of market news is not relevant. Warren Buffet takes an approach of forgetting what the market so called “experts” are saying, and focuses on the business he's considered investing in. He focuses on whether the business he is considering can be bought at a good price, along with other fundamental analysis, and then he uses this to determine if it's a good buy.
9. Focus on The Business's Economics, Not the Management
This isn't to say that the company management or executive team isn't important. Rather, it's to say that what is most important is the actual business's economics.
An example used in Buffettology is comparing two ships. Both ships are the exact same size, make and model. Regardless of who the captain is on either of the ships, there isn't anything the captain can do to make it go faster. So, what is one to do? Put the captain on a faster ship!
In other words, the ship is like the company's product or service, as well as the company's economics. If the business is founded on a great product or service, there is only so much the management team can or can't do to make the ship go faster.
10. Warren Buffett Likes Conservatively Financed Companies
If a company has a strong consumer monopoly, meaning it's got the majority of the market share and growing, it's most likely spinning off cash hand over fist. If this company is responsible with its finances, it will be cash heavy and light on long term debt, giving it complete control of its future innovation.
Companies spinning off cash quickly and taking on little to no long-term debt make for great investment opportunities.
Want More Advice from Warren Buffett?
There is a lot you can learn from the greatest investor who ever lived, and many of the untold strategies are found in Buffettology by Mary Buffett and David Clark.
by Mary Buffett and David Clark
Furthermore, you can read every Berkshire Hathaway shareholder letter from Warren Buffet here to get it from Buffett himself.
Other books worth reading about Warren Buffett are:” and “The Warren Buffett Way.”
By Roger Lowenstein
by Robert G. Hagstrom