Warren Buffett's Investing Philosophy

Posted: Aug. 31, 2017, 11:55 a.m. by

Buffett


There may be no investor in America more respected than Warren Buffett, the so-called “Oracle of Omaha.” When it comes to investing philosophy, Buffett’s couldn’t be easier to understand.

He is a value investor. His goal is to find securities with prices lower than their intrinsic worth. It’s a goal that gives meaning to “buy low – sell high,” the simple mantra of Wall Street.

Related: Bet Like Buffett

Return On Equity

Sometimes referred to as “return on investment.” It’s a measure of the rate at which shareholders earn income on their shares. Buffett looks at ROE to determine whether a company has consistently performed well compared to others in the same industry.

Debt/Equity Ratio

Buffett wants to see a small amount of debt so earnings growth is generated from shareholders’ equity and not from debt.

Profitability

“Are profit margins high? Are they increasing?” Buffett asks these questions to determine how consistently a company he is considering investing in increases its margins.

Ten Year Rule

Not so much a rule as a guideline. Buffett is known to only consider investing in companies that have been around at least 10 years. The reason is simple. If they perform consistently well after a decade there is a better chance they are here to stay.

Commodity Aversion

When a company’s products are indistinguishable from the competition and rely solely on a commodity such as oil or gas, he is disinclined to show interest.

25%Discount Marker

If a company meets all other criteria and sells at a 25% discount, tells Warren Buffett the stock is undervalued and of interest to him. This is the most difficult part of investing and Buffett is a genius at it.

Rules To Live By

Buffett follows some very easy to understand, simple rules. One is, "If the business does well, the stock usually follows." This speaks to Buffett’s conviction that investing in a company’s stock is the same as owning a piece of the business.

Another rule, "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," is just Buffett’s way of saying he wants a good deal but not one that is too good to be true.

"Our Favorite Holding Period Is Forever," is an often-quoted rule that reinforces something else he has said – if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.

Related: Two Types Of Stock Analysis

Advice For The Ages

Finally, Warren Buffett loves to offer sage advice – advice that speaks for itself. Here are 10 pieces of advice that do just that:

  1. Invest in what you know…and nothing more.
  2. Never compromise on business quality
  3. When you buy a stock, plan to hold it forever
  4. Diversification can be dangerous
  5. Most news is noise, not news
  6. Investing isn’t rocket science, but there is no “Easy Button”
  7. Know the difference between price and value “Price is what you pay. Value is what you get.”
  8. The best moves are usually boring
  9. Low-cost index funds are sensible for almost everyone
  10. Only listen to those you know and trust