Warren Buffett, widely regarded as the greatest investor ever because he became the world’s richest person not through inheritance or building a business, but purely through his investing acumen. Starting with an original investment of just $10,000, Buffett built a fortune of $60 billion, making him the world’s wealthiest individual for many years. Buffett is also the chairman and CEO of Birkshire Hathaway, headquartered in Omaha, Nebraska, an unusual publicly traded company that primarily invests in other businesses and oversees a number of subsidiary companies. Buffett’s annual letters to shareholders of Birkshire are packed with his unique blend of humor and investing wisdom.
Buffett showed an early interest in business and filed his first tax return at age 14.His interest in the stock market started at an early age as well — his father owned a stock brokerage and Warren often visited an office near his home in his childhood.
One of the most quoted individuals, Buffett is known for his midwestern way of speaking and low-key charm. He avoids Wall Street and still lives in a house he bought back in 1957 in Omaha, Nebraska. More recently Buffett is known for his philanthropy, giving away his massive fortune through the Gates Foundation with the help of his billionaire friend Bill Gates.
Buffett’s Investing Methods
Warren Buffett’s investment methods were heavily influenced by the founder of value investing, Benjamin Graham. He relies upon Graham’s three main principals for determining what to buy and when. Early in his investment career Buffett made extensive use of arbitrage as well as buying businesses for less than their breakup value. Later as his investment capital grew too large to pick up enough niche deals, he switched to buying (entire or large portions of) businesses with the intent to hold forever.
What to Buy
While still a value investor who avoids the high tech industry, Warren Buffett uses his enormous investing capital (in the tens of billions) to buy whole or large businesses at a discount to their long-term economic value. These businesses tend to have:
- High returns on equity and high profit margins
- A strong brand or other economic “moat” that gives them a competitive advantage
- Management who maximizes shareholder value
When to Buy
The best time to buy is summed up by the quote:
Be fearful when others are greedy and greedy when others are fearful.
Buffett prefers to buy when the long-term value and earnings of a business are significantly undervalued by the market. Therefore he has to wait for a crisis in confidence in either the stock or the market in general.
When to Sell
Buffett claims his favorite holding period is forever. He often sells a business when he made a wrong decision and bought the wrong business at the wrong time, even if it costs him money. Buffett also will sell a stock if he can’t trust the management or influence them to maximize shareholder value.
Examples
Coca-Cola
One of his earliest purchases of a business at a big discount to its future value was Coca-Cola. He purchased his stake in the 1988 following the market crash in 1987. The business subsequently expanded across the global and added new products to its distribution system thus earning Buffett billions of dollars in net worth plus millions in annual dividends.
ConocoPhillips
An example of when to sell is petroleum company Conoco-Phillips, which Buffett bought in 2008 at the height of the oil price spike to $150/barrel. Following the financial crisis and stock market crash in late 2008, oil crashed to just $40/barrel. Buffett admitted buying the business at the top and sold his shares for a multiple billion dollar loss rather than holding on for an indefinite period of time waiting for a recovery.
Summary
Warren Buffett accomplished a feat that will unlikely be ever repeated. He amassed a massive fortune and became the world’s wealthiest individual purely through investing in other people’s businesses. His essential investment strategy was to buy a highly profitable business that he understood really well during periods of market uncertainty.
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