Warren Buffet was born on August 30, 1930, and is now 92 years old. He is a big inspiration to investors not only in the US but in the world. He began investing in stocks at age 10 and was a millionaire by his early 30s when he began buying Berkshire Hathaway stock at $7.60 per share. Today, Berkshire trades at about $465,000 and Buffett has a net worth of $107 billion.
Buffett’s investing strategies are widely documented and followed because of his long-term success in the stock market. Through his investments in Berkshire Hathaway, the company has grown 129,184% since 1980. Compare that with the S&P 500, which has grown 11,527% (dividends re-invested). That’s about 12% per year (annualized) for the S&P 500 and close to 20% for Buffett’s investments. Buffett runs Berkshire Hathaway with long-time business partner Charlie Munger.
Buffett is a member of the Benjamin Graham value investing school. Rather than focusing on technical indicators such as moving averages, volume, or momentum indicators, value investing considers a stock's intrinsic value. Understanding a company's financials, particularly official documents such as earnings and income statements, is required to determine intrinsic value.
Warren Buffett’s investment advice:
- Never Lose Money, one of the most famous Buffett quotes of all time emphasizes that he is a very cautious investor who will only make investments that have a very high probability of profiting. Warren is actually averse to taking risks.
- Invest only in companies you understand, Investing in what you know can give you an edge while drifting into unknown industries or sectors can be a recipe for trouble.
- Diversification is good but avoids over-diversification: He believes that diversification only works up to a point, and after a point, it does not help in risk reduction. Hence, investors need not have a large stock portfolio.
- Invest for the long term: When asked how long he thinks a stock should be held, he always says "forever." You do not have to take it literally, but you get the point - equities are never about the short term.
- Focus on quality, Warren Buffett does not invest in junk companies. He rarely buys struggling businesses, no matter how cheap they become. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," says Buffett.
- Don't fear market crashes and corrections. Buffett loves it when stock prices drop since it creates opportunities to buy at a discount. If you were shopping at your favorite store and suddenly learned that the entire store's prices were 20% lower, would you panic and run away? Of course not.
- To understand compounding, Buffett uses compound interest, dividend reinvestment, and the power of constantly reinvesting the operating cash flow generated by Berkshire's businesses to his advantage. How powerful is this? Berkshire has averaged a 20.1% annualized return since Buffett took over in 1964, compared with 10.5% for the S&P 500. This may not sound too spectacular until you realize that, over time, this has resulted in a 3,641,613% total gain for shareholders versus just 30,209% for the S&P 500.
How Warren Buffett chose stocks to invest in?
- Margin of safety
The margin of safety is the difference between the entry price and the intrinsic value of the company, or the value of its assets. Buffett is a value investor, so if he sees an appealing valuation for a solid company, he believes it is worthwhile to purchase. How to tell if a company is "solid" is discussed in the points below. Buffett's mentor wrote The Intelligent Investor, which is all about investing with a margin of safety based on stock valuations.
- Debt to equity
Buffett prefers lower debt relative to company equity. Shareholders’ equity is on the balance sheet. Debt means interest, and lots of debt means lots of interest payments and increased risk. Debt-to-equity is total liabilities divided by shareholders’ equity. There is no magic number because certain industries will have a greater or smaller amount of debt. What matters is the debt-to-equity comparison against industry peers. The lower the debt-to-equity relative to the competition, the better.
- Companies with Good Earnings
Buffett seeks companies with a track record of consistent earnings growth, particularly over a five to ten-year period. However, he is not overly concerned with quarterly earnings results because he believes the investment analyst community and media are overly focused on short-term results, which is detrimental to business.
- Company Actively Buying Back its Shares
This usually means that the company’s management sees a bright future and also believes the stock market severely undervalues the company. This is often a good omen and is seen as a definite positive.
Warren Buffett’s and Berkshire Hathaway’s top investments
- Apple’s $157 billion
Apple holds the biggest portion of nearly 43% worth $157 billion in Berkshire’s portfolio as of June ‘22. Buffett invested in Apple due to its extraordinary consumer franchise & monopoly in the smartphone market.
- Bank of America: $36.6 billion
Bank of America holds the second biggest portion of nearly 10% worth $36.6 billion of Berkshire’s portfolio. Buffett invested in it due to its strong top management, cheaper valuation, and healthy financials.
- Coca-Cola: $26 billion
Coca-Cola holds the third biggest portion of 7.1% worth $26 billion in Berkshire’s portfolio as of June 2022. Buffett invested in it as Coca-Cola was a monopoly and undervalued relative to its growth potential.
- Chevron: $25.8 billion
Chevron is the newcomer in the top 5 list with 7% of Berkshire’s portfolio worth $25.8 billion as of June 2022. Buffett is adding more Chevron due to its cheaper valuation and rising crude oil prices globally.
- American Express: $24.6 billion
American Express is the fifth biggest stock holding 6.7% of Berkshire’s portfolio worth $24.6 billion as of June 2022. Buffett became bullish on the stock due to its great top management, strong brand, and customer loyalty.
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