Warren Buffett is possibly the world’s best-known investor, but what is his investment philosophy?
His investment philosophy is rooted in value investing, which is a strategy where investors seek to buy stocks that are trading below their intrinsic or fair value, hoping to profit when the market recognises the true worth of the company and the stock price rises.
Therefore, I thought that I would investigate this further, and I discovered the following key points:
- Invest in Businesses, Not Just Stocks – This means thinking like an owner. Buffett sees buying a stock as buying a piece of a business, not just a piece of paper to trade.
- Understand the business – Buffet only invests in companies he fully understands. This is often called his “circle of competence.”
- Value Investing – This means buying undervalued companies. Buffett looks for companies trading below their intrinsic value (the true worth of a company based on fundamentals). To help manage the risks around this, he insists on a cushion between the price paid and the intrinsic value to reduce risk.
- Long-Term Focus – Buffett prefers to hold investments indefinitely, obviously assuming the business continues to perform well. He once said, “Our favourite holding period is forever.”
- Strong Financials – Buffett looks for consistent earnings, strong return on equity (ROE), low debt levels and robust free cash flow
- Competitive Advantage (Economic Moat) – Buffett seeks companies with a durable competitive advantage (sometimes called a “moat”). This advantage could be strong brands, cost advantages, or network effects.
- Quality Management – Buffet tries to invest in businesses run by honest, capable, and shareholder-friendly managers. He prefers leaders who think like owners and reinvest capital wisely.
- Cash is king – Buffett emphasises free cash flow over reported profits.
- Capital Management – Buffett believes in effective capital allocation. This means reinvesting where returns are high or returning capital to shareholders if not.
- Patience and Discipline – Buffet avoids market speculation and ignores short-term trends or noise. He follows the principle: “Be fearful when others are greedy, and greedy when others are fearful”
I hope that you found them useful
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