Warren Buffett is arguably the best investor in the world, and is CEO of Berkshire Hathaway – the investment company he built from the ground up. He is nicknamed “The Oracle of Omaha” for his legendary ability to make great long-term investments. His investment style is very unique and unorthodox among the investing world, but obviously extremely successful. His strategies also provide some great rules, tips, and lessons that the average investor can apply.
1) Buy undervalued stocks
Buffett is famous for identifying stocks that are trading below their book value, have strong management teams, and great cash flows. These factors are very important in Buffett’s decision making process.
Buffett is extremely patient when deciding to make and investment and to leave an investment. He waits for the right opportunity when the price is low before entering. He is also very patient in exiting a position. Buffett once described his favorite holding period as “forever”. If the price of a stock is anticipated to continue to rise, he will continue to hold as his equity grows.
3) “Be greedy when others are fearful, and fearful when others are greedy”
This is a classic contrarian approach. Investors often react emotionally and so stocks are often over-bought (when people are greedy) or over-sold (when people are fearful). This presents great investment opportunities for people who have the patience and timing to find an undervalued investment and take advantage of it.
4) Don’t diversify
Buffett believes that if you invest in too many companies, you just dilute your profit potential. He recommends focusing on just a few companies, really getting to know them very well, and making significantly large investments in them. If you have done your analysis correctly, it will result in big profits.
5) Invest in companies you know and understand
Berkshire Hathaway is a big investor in Coca-Cola, and this is a classic example of this principle since Buffett drinks several cans a day. He only invests in companies that he knows, understands, and often times uses.
6) Companies must have a competitive advantage
Buffett believes it is critical that the companies he invests in have a major competitive advantage, and this advantage will serve as an “economic moat”. Examples of these advantages are superior quality, great distribution networks, low costs, industries with high entry costs, etc.
7) Experienced management teams
Berkshire Hathaway has been known to buy majority stocks, or 100% stocks in companies. However before they commit, Buffett insists that there is an experienced and very well qualified management team in place already. He does not want to run the day-to-day operations of the company so needs people he can trust.
8) American companies
Buffett is famous for this passion for American companies and believes it is the best long-term region for growth. That being said, he has started to make some foreign investments such as Iscar (toolmaking company in Israel), and Sanofi (pharmaceuticals company in France).