In choosing stocks, Buffett adheres exclusively to fundamental analysis – he chooses stocks based on the financial and performance indicators of the issuing companies. He buys not just stocks, but the successful business behind these securities. Of course, Buffett is a long-term investor – on average, he has held shares for 10 years.
Stocks are a simple thing. All you have to do is buy shares in a large business for less than the true value of that business, provided that it has managers of the highest integrity and the same ability.
What Does Buffet Do?
Buffett is looking for companies with long-term financial performance, effective management, multiple competitive advantages, and high-quality consumer products under a popular brand name. In other words, companies that generate a steady cash flow and are able to reinvest it in their own growth and development.
Buffett often bought shares of a particular company, even when other investors were waiting or considered the deal to be obviously unprofitable.
Acquisition of shares in unstable but promising companies
Buying a company in serious financial difficulties requires a deep understanding of the nature of its business and a correct assessment of the causes of these difficulties. Understanding these details comprehensively is what makes Buffet one of the best stock traders of all time.
An example of this strategy is the purchase of shares in Wells Fargo Bank in 1990. The moment Buffett bought his shares, the bank was not doing well. In 1990, California entered a period of economic recession, property prices fell dramatically. A significant part of the bank’s loans was provided just for the purchase of the real estate. Investors had strong doubts about the repayment of these loans, and many of them believed that the bank would have big problems with solvency.
Wells Fargo shares fell 30 points, at which point Buffett bought it. He believed that the chief executive Carl Reichardt and his management team were able to bring the bank out of the crisis. Under the leadership of Reichard, the bank implemented a cost-cutting program, laid off part of its employees, revised payment and compensation programs for personnel, identified and mobilized additional sources of growth in sales, offering clients new types of financial services.
Buffett bought shares in the bank at a price below par, and soon after, California entered a phase of economic recovery and the real estate market revived significantly. Buffett invested $392 million in Wells Fargo (in addition to the value of the shareholding), and at the end of 1999 it turned into $ 2.39 billion.
Acquisition of shares during the general stock market crisis
An example of this strategy is the purchase of shares in the Washington Post. In 1973-1974, the Dow Jones fell 45%. Buffett waited until the newspaper’s shares fell 30 points and bought them at $ 6.37 per share (including additional issues). The newspaper’s real share price, measured by its sales and profitability, was at least four times the price of the deal. Buffett was as impressed by the newspaper’s financial performance as by the cohesion and professionalism of the staff.
In 1993, Buffett received dividends on his 10 millionth investment in the amount of $ 7 million a year, despite the fact that the market value of his shares reached $ 400 million. In 1999, it was already $ 960 million.
The evolution of Buffett’s investment strategy
While looking for a suitable investment, Buffett looked at those securities that were sold at nominal prices or at prices calculated based on the volume of sales of the company that issued them. He considered financial statements as the main selection criterion and became the pioneer of an investment strategy based on them. To hedge against possible mistakes, Buffett built a diversified portfolio of securities.
Buffett developed his own concept of safe investment, which consisted of the purchase of securities at prices for a certain amount less than their underestimated value. For example, if he believed that the real price of a company’s shares was $ 20 per unit, then he bought them only after the share price fell to $ 14. In this case, the safety margin was 30%. And the larger that stock was, the more successful Buffett considered the deal.
Buffett invests for a long time because he is convinced that it will not be possible to extract all the potential benefits from a purchase within a few years.
Warren Buffett’s Simple Investment Rules
Success comes to those who are patient, know the stock market and business in general, and are highly self-disciplined. In addition, you need to know 5 basic rules of investing from Warren Buffett
- Outline your action plan in writing or keep it in mind, and most importantly – stick to it as strictly as possible in practice.
- Be flexible enough: if circumstances or new information change the situation significantly, change your action plan.
- Study the dynamics of sales and profits of the company. Analyze the sources of their receipt.
- Focus on a potential investment. Carefully analyze the range of products or services provided by a company, its position in the industry as a whole, and in comparison with its closest competitors.
- Gather as much information as possible about the people running the company.