Warren Buffet is one of the best-known investors. This article will explain his investment strategy and how you can benefit from this strategy to invest yourself in the stock market and build up a fortune for yourself, family and children.
For decades, Warren Buffet has attracted the most attention because of his performance in investing. His investing company Berkshire Hathaway has become one of the biggest companies in the world with a market value of more than $511 billion. Directly, the company has about only 50 employees. Buffet is so respected that a young Chinese internet millionaire spend more than $4 million only to have lunch with him. –
Did you know? Fun fact about Warren Buffet
- While Warren Buffet is usually thought to be the best investor of our lifetime, he is actually not. The best investor is a man you have never heard about. Neither is this person a financial professional.
- Instead this man, James Simmons, is a mathematician who founded Renaissance Technologies, a hedge fund valued at more than $20 billion that uses computer algorithms to invest. In the past 20 years, his Medallion fund has averaged more than 70% in annual returns compared to Buffet’s 20%.
Warren Buffet’s concept of Value Investing
Warren Buffet started his investing career in the 1950s. He was inspired by Benjamin Graham who was a professor at Columbia University. His book The Intelligent Investor became one of the most influential investment books in the world ever. It also had a big impact on Warren Buffet as it made him aware of the concept of value investing more than 70 years in the beginning of his career.
The concept goes like this. In the financial market, companies are not created equal. There are different classes of these public companies. The three most important categories are growth, value, and income companies.
- Growth companies are the relatively new companies that are growing fast. These companies tend to be unprofitable. Their stocks tend to perform very well in the short term because of the amount of growth they generate.
- Value stocks are companies that are mature in nature but those which are undervalued. The multiples of these stocks tend to be slightly lower because the demand and hype from investors is usually not much.
- Income stocks are those that have a long history of returning money to investors. Examples of income stocks are Real Estate Investment Trusts (REITs).
As a value investor, Warren Buffet prefers investing in value stocks that he believes are undervalued. For this reason, he has avoided investing in growth companies like Google, Facebook, and Salesforce.
Long Term Investor
Apart from being a value investor, the investment strategy of Warren Buffet is that of long-term ownership. Historically, Buffet avoided being a short-term investor. Instead, he focuses on a buy and hold strategy: buying companies and holding them for decades.
- For example, he invested in Coca-Cola in 1988 and still holds it. He bought Geico in 1995 and still holds it. He bought Wells Fargo almost ten years and he still holds it.
- In short, he believes in buying stocks and holding them for years. As a result, he does not make a lot of investments every year.
Simple, Quality, Moat, and Returns
Other than buying undervalued companies, Warren Buffett’s portfolio is made up of quality simple companies with a moat. Most of his holdings too are companies that return money to investors through share buybacks and dividends. For example, a company like Apple is simple because it is easy to understand because we all know how it makes money. The same is true with companies like Coca Cola and Visa.
Portfolio of Warren Buffet
The chart below shows the portfolio of Warren Buffet of 2019.
|Stock||Value||% of portfolio|
|BANK AMER CORP||$24,725,263,000||12.39%|
|WELLS FARGO & CO||$19,801,718,000||9.92%|
|COCA COLA CO||$18,744,001,000||9.39%|
|AMERICAN EXPRESS CO||$16,571,049,000||8.30%|
|KRAFT HEINZ CO||$10,631,977,000||5.32%|
|US BANCORP DEL||$6,231,393,000||3.12%|
|JPMORGAN CHASE & CO||$6,024,697,000||3.02%|
|BANK OF NEW YORK MELLON CORP||$4,081,666,000||2.04%|
|DELTA AIR LINES INC DEL||$3,662,525,000||1.83%|
|GOLDMAN SACHS GROUP INC||$3,523,714,000||1.76%|
|SOUTHWEST AIRLS CO||$2,784,931,000||1.39%|
|GENERAL MTRS CO||$2,681,205,000||1.34%|
|DAVITA HEALTHCARE PARTNERS||$2,093,725,000||1.04%|
|CHARTER COMMUNICATIONS INC||$1,981,103,000||0.99%|
|UNITED CONTL HLDGS INC||$1,750,265,000||0.87%|
|U S G CORP||$1,688,787,000||0.84%|
|AMERICAN AIRLS GROUP INC||$1,387,912,000||0.69%|
|LIBERTY MEDIA CORP DELAWARE||$1,188,920,000||0.59%|
|PNC FINL SVCS GROUP INC||$1,063,591,000||0.53%|
|COSTCO WHSL CORP NEW||$1,049,281,000||0.52%|
|RED HAT INC||$933,683,000||0.46%|
|AMAZON COM INC||$860,637,000||0.43%|
|M & T BK CORP||$845,088,000||0.42%|
|TRAVELERS COMPANIES INC||$817,253,000||0.40%|
|SIRIUS XM HLDGS INC||$781,982,000||0.39%|
|TEVA PHARMACEUTICAL INDS LTD||$678,149,000||0.33%|
|STORE CAP CORP||$623,826,000||0.31%|
|AXALTA COATING SYS LTD||$611,696,000||0.30%|
|LIBERTY MEDIA CORP DELAWARE||$567,369,000||0.28%|
|RESTAURANT BRANDS INTL INC||$549,413,000||0.27%|
|LIBERTY GLOBAL PLC||$493,192,000||0.24%|
|SUNCOR ENERGY INC NEW||$348,882,000||0.17%|
|LIBERTY GLOBAL PLC||$177,870,000||0.08%|
|LIBERTY LATIN AMERICA LTD||$52,505,000||0.02%|
|JOHNSON & JOHNSON||$45,725,000||0.02%|
|PROCTER & GAMBLE CO||$32,817,000||0.01%|
|MONDELEZ INTL INC||$28,854,000||0.01%|
|LIBERTY LATIN AMERICA LTD||$24,974,000||0.01%|
|UNITED PARCEL SERVICE INC||$6,637,000||0.00%|
Warren Buffet is known for his patience as an investor. Today, he sits on more than $100 billion in cash. In interviews, he has said that he does not see any companies that fit his criteria to invest in. This is probably a wise thing by Buffet, who is usually called upon in times of financial disasters. In the financial crisis of 2008, he was called upon to save Lehman Brothers but he didn’t. Instead, he invested in banks like Bank of America and JP Morgan.
No investor is ever perfect.
Even the best investors in the world make mistakes. Some of Warren Buffet mistakes:
- One of the Buffet’s recent investment mistake was to invest in a company known as Kraft Heinz. Recently, the company restated its income, which led its stock to tank.
- Another mistake was Wells Fargo, which has been caught up in multiple financial crisis.
- Another Warren Buffett mistake was to avoid to invest in growth companies like Google and Amazon. If he did, his performance would have significantly better.
- Also, he failed to invest in cryptocurrencies, which have become the best performing assets of the past ten years.
Warren Buffett is one of the best investors of our time. When he speaks, people, including other investors listen. What is good about the investment strategy of Warren Buffet is how simple it is and how anyone of us could apply it. All you need is to have some money, find quality undervalued companies, and invest in them for the long term. The companies need to be returning money to investors through buybacks and dividends. After this, you should combine it with investing in growth stocks.