Warren Buffett who is known as the Oracle of Omaha is one of the wealthiest and most influential people in America but the main reason for his popularity and wealth is his investment style which makes him one of the successful investors of all time. Do you know, the company named Berkshire Hathaway which is control by Warren Buffett give rise of stock from $108,480 in 2010 to $278,640 in 2020.
We know, it’s difficult to act like a Warren Buffett but the good thing is this at least we have a access to Warren Buffett investment principles through popular books like The Buffettology, the Warren Buffett way, his letters to shareholders and I tried to summarise his main principles by referring to various sources. These are:-
1. Invest in a business, not in a share – Buffett never believe to invest in the business for a short term gain. He always looks at an investment for a long term and analyses the company’s fundamental deeply to follow the strategy buy and forget for a long time until major macro or micro change impact the business model. You will find the Berkshire Hathaway invest in a company for a very long time, perhaps a lifetime.Most of the investors panic because they invested in the stock which is changing every hour or at least every day which is the main reason for their loss of money but the great investors understand the underlying business, not focus on stock market price movements. One of the classic examples is Coca-Cola
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” —Warren Buffett.
2. Find a company’s intrinsic value to invest– Buffet always focus on the intrinsic value of a company which helps him to calculate how much cash a company is expected to generate over its lifetime. There is a high probability that every stock price try to match with its intrinsic value which helps to gain profit.
3. Analyze management – Buffett always in favour to invest in a company whose returns may be average but the management is good enough to take the company profits rocket high. It is easy to check the management performance by analysing some of the important factors such as
- Low debt
- High current ratio
- Strong and consistent ROE
Why it is so important to factor the management performance?
If we consider ourself as a passenger and company as a car and management as a driver then it’s a driver responsibility to take us safely to our destination and if the driver is not trained enough then there is a high probability that we may or may not reach to our destination in a safe condition.
4. Invest in businesses you understand – Every industry and company has a unique way to conduct sales and expenses. For eg. Construction company are executing their projects on high debts which is a nature of its business and Financial companies mainly select based on their ROA and NPA. A one can always make the right decision if he/she connects well with the company. In short, never invest in a business which is outside of your “circle of competence”
5. Find businesses that have a real advantage – We are living in such a competitive world where a good idea of a company can copy in minutes. Buffett believes that invest in businesses with a strong brand or a unique product whose idea cannot copy such as Coca-Cola.
If Buffet’s techniques and principles presented here are intelligently implemented then it should make you a better investor.
In April 2008, Warren Buffett spoke to a group of business students at the Berkshire Hathaway headquarters in Omaha, Nebraska. Fortune mag-
azine was on hand to record his words, quoting Buffett as saying:
- “You know, I always say you should get greedy when others are fearful and fearful when others are greedy.
In short, Warren Buffett invests in a company by following four simple principles.
1. Company lead by great leaders 2. Long-term prospects 3. Stock stability 4. Buy at attractive prices.