Investing according to Warren Buffett

Warren Buffett is the most successful investor in history. His style is derived from the value investing of his mentor Benjamin Graham, author of the classic investing masterpiece, “The Intelligent Investor.” In this book, Graham emphasized the importance of research into the intrinsic value of a company and a share. When investors calculate that value correctly and buy shares at prices below that intrinsic value, they will make money on the stock market.

Warren Buffett

Warren Buffett was born in Omaha, the largest city in the American state of Nebraska. Warren was born in this city on August 30, 1930 and still lives and works there. After studying at the University of Nebraska, he received his MBA degree from Columbia Graduate Business School in New York. There he also took lessons with Benjamin Graham. Before Warren Buffett transformed the brokerage firm Berkshire Hathaway into an investment vehicle, he worked for a number of years in Graham’s investment partnership. This partnership also included other well-known value investors: Walter Schloss (retired in 2000), Tom Knapp (one of the founders of Tweedy, Browne Partnerships) and Bill Ruane (founder of the Sequoia Fund).

Master in assessing risks

One of the most important characteristics of Buffett is that he thoroughly enjoys what he does: poring over pounds of quarterly and annual reports, going through stacks of newspapers and magazines and dealing with people. He excels in decisiveness, discipline, flexibility, patience, courage and confidence. Buffett is continuously looking for investments without or with a minimum of risk. He knows how to properly assess the potential of an investment. This skill seems to stem mainly from his love for simple mathematical calculations and bridge. He also has years of experience with risks in the world of insurance and reinsurance. Buffett is willing to take risks provided that the chance of a total loss of the investment is small. He knows how to accurately and quickly distinguish the strengths and weaknesses of a company.

Limiting the investment risk

Many investment advisors and funds think they can reduce their risks by diversifying, for example across different sectors and maximizing an investment in a specific share compared to the total of the portfolio. However, Warren Buffett believes that you can limit the investment risk by keeping the number of shares in the portfolio within limits, for example no more than ten different shares. Such a restriction obliges the investor to thoroughly research the eligible shares.

Purchase decision

Graham described an investment as “a purchase of a security that, after thorough analysis, appears safe and offers the prospect of a good return. We classify transactions that do not meet these criteria as speculation.” By extension, Buffett is only interested in stocks of companies that he understands, that have excellent prospects and that are led by reliable management. For Buffett, there is actually no fundamental difference between buying shares of a publicly traded company or buying the entire company. He sits, as it were, in the management seat when he considers a purchase. He examines the company and pays attention to the qualitative and quantitative aspects of management, the financial position of the company and finally the share price.

Fundamental view of the stock market

Warren Buffett does not believe in the efficient market hypothesis, the assumption that all information is incorporated into the stock price. According to Buffett, the stock market can ignore a company’s strong fundamental situation for a while. Such situations offer the opportunity to purchase shares in a favorite company. Buffett is mainly interested in turnover, sales figures, profit and profit margins and the possible demand for new capital. He attaches less importance to stock market price fluctuations. Buffett often jokingly said that as far as he was concerned the stock market could remain closed for ten years. For example, the stock exchange closes every Saturday and Sunday, something that has never hindered his investment decisions. Economic cycles can also be stolen from him. The only economic data that interests Buffett is inflation, specifically the extent to which inflation affects corporate earnings.