Longtime Berkshire Hathaway CEO Warren Buffett is arguably the world’s greatest stock investor. He is also a bit of a philosopher. Buffett distills his investment ideas into simple, memorable sound bites. Here are some of the most popular.
Key receivers
- Longtime Berkshire Hathaway CEO Warren Buffett ranks as one of the richest men in the world.
- Buffett is seen by some as the best stock picker in history and his investment philosophies have influenced countless other investors.
- One of his most famous sayings is “Rule #1: Never lose money. Rule #2: Never forget rule #1.”
- Another said, “If the business is good, the stock will eventually follow.”
Alison Czinkota / Investopedia
Rule #1: Never lose money. Rule #2: Never forget Rule #1
Buffett It lost nearly $25 billion in the 2008 financial crisis and the company lost Berkshire Hathaway’s coveted AAA rating. So how does he tell us not to lose money?
It refers to the mindset of a savvy investor: Don’t be vain. Don’t gamble. Don’t go into investing with the cavalier attitude that it’s okay to lose. Find out. Homework work. Buffett only invests in well-researched and well-understood companies. He doesn’t go into an investment set up to lose and neither should you.
Buffett believes that the most important trait for an investor is character, not intellect. A successful investor does not focus on being with or against the crowd.
The stock market experiences volatility. But Buffett is focused on his goals in good times and bad, and so are all serious investors.
Warren Buffett doesn’t change his long-term investment strategy much no matter what the market does.
Warren Buffett doesn’t change his long-term investment strategy much no matter what the market does.
Rule #3: If the business is good, the stock will eventually follow
When choosing investments, Buffett looks for businesses that show good long-term prospects. Does the company have a consistent work history? Does it have a major business franchise? Does the business generate high and sustainable profits? If a company’s stock price is below expectations for future growth, it’s a stock Buffett wants to own.
Buffett won’t buy stock in a company unless he has a written reason for wanting to pay a certain price for the stock. Other investors may benefit from the same exercise.
Rule #4: It’s better to buy a great company at the right price than a great company at a great price.
Buffett is a value investor who likes to buy quality stocks at reasonable, if not rock-bottom, prices. The goal is to build a stock portfolio that will reward strong returns and capital appreciation for years to come. When the markets rallied during the 2007-2009 financial crisis, Buffett spent billions in names like General Electric and Goldman Sachs, using it to stock up on prized long-term investments.
To pick stocks effectively, disciplined investors establish criteria and stick to them. They may look for companies that offer a high-quality product or service and have strong operating income and the potential for future profits. You can establish the minimum market capitalization and maximum price-to-earnings (P/E) ratio or debt level that you are willing to accept. Given the unknown market risk, finding the right company at the right price is the ultimate goal.
Remember that the price you pay for a stock is not the same as the price you get in return. Successful investors know the difference.
121 billion dollars
Berkshire Hathaway CEO Warren Buffett’s net worth as of August 2023, according to Bloomberg.
Rule #5: Our favorite retention period is forever.
Warren Buffet is the ultimate exponent of the buy-and-hold philosophy.
How long should you hold a stock? If you’re not comfortable owning Buffett for 10 years, you shouldn’t own it for 10 minutes. Buffett held most of his portfolio even during the financial crisis, which he referred to as “economic Pearl Harbor.”
Unless a company is experiencing a sea change, such as unavoidable labor problems or product obsolescence, making a long-term commitment to the investor is highly impersonal. Being overly fearful or greedy can cause investors to sell or buy stocks at high levels and destroy portfolio appreciation in the long run.
What are the essence of Buffett’s investment principles?
The short answer is to buy undervalued stocks with strong long-term potential. The long answer is that it requires research and constant commitment to the companies you invest in. Keep them through thick and thin unless something material has changed in the company’s view, such as product expiration.
What metrics does Buffett look at when analyzing a particular stock?
Buffett is known to focus on market capitalization (not too small), debt levels (not too large), in addition to analyzing the company’s long-term business prospects, whether it has competent senior management and a strong balance sheet. And earnings per share (not too high). Today he looks for strong companies with healthy balance sheets and positive long-term outlooks, investments that can be held for the long term.
What is the ideal holding period for an investment?
Buffett might answer that question with a cryptic “forever,” and that’s not far from the truth. He maintains his portfolio and can add to it even during periods of extreme market volatility, if certain holdings fall to attractive price levels. Buffett is a long-term value investor who sees volatility as an opportunity to buy at attractive levels or take profits and sell some of his holdings if they reach a reasonable price.
Bottom line
It is safe to say that Warren Buffett is an unattainable investor. He does this by following some very basic rules for buying and holding investments in his portfolio. But beyond simple rules, the method used to pick stocks involves a lot of research aimed at establishing a fair value for a particular stock.
The rest of the market may be in panic-selling mode, but Buffett sees opportunities when prices fall below his predetermined fair valuation. Arguably, stock XYZ is liked, but not at its current market price. If the price of that stock falls into the preferred value range, he is ready to buy it. To paraphrase Buffett, the market is there to accommodate your investment strategy but only when the price is right.
