Buffett’s investment philosophy

Original link: https://blog.forecho.com/warren-buffetts-investment-philosophy.html


Buffett is widely regarded as one of the most powerful investors. His 55-year average annualized rate of return is 21%+, what is this concept? Suppose 55 years ago you had $1,000 in compounding investments:

  • If you invest in a 3% Treasury bond, you will have $5,082.15 in 55 years.
  • In the stock market, let’s assume a 7% annualized rate of return, you would have $41,315.00 in 55 years.
  • Hand it over to Buffett, with a 21% annualized rate of return, and you have $35,743,359.35 in 55 years.

After reading this set of data, you will know why Buffett is so good, so let’s get to the point quickly, let’s talk about Buffett’s investment philosophy.

PS: With compound interest calculator

pick up cigarette butts

Buffett’s initial investment strategy was to pick up cigarette butts . The feature is to look for a cheap stock, not how good it is.

When it analyzed a company at that time, it looked at Working Capital, which is working capital, which refers to the assets and liabilities in the company. If all the assets and liabilities in the company are sold, if the money is higher than the stock market value, then the company’s assets and liabilities are sold. Stocks are cheap.

For example, if you buy a mobile phone, if the parts of the mobile phone are taken apart and sold separately, the price is higher than that of the mobile phone. Isn’t this a risk-free arbitrage?

In the early days, Buffett followed his teacher to find this kind of “big cigarette”. Although it is easy to say it now, it was a very difficult thing in his time. At that time, there were no computers and the Internet. Only Newspapers, they have to keep reading financial report data and bury their heads in research.

Fortunately, Buffett is very sensitive to numbers and has a good memory. He became a millionaire within a few years. What is the concept? In his day, a millionaire could afford half of Shanghai. Become an investment guru.

suffered heavy losses

Just as Buffett’s career was thriving, he suffered a major blow.

At that time (1962) he saw a textile factory called Berkshire Hathaway (Berkshire Hathaway), its working capital was 20 dollars, but its stock price was only 7.5 dollars. At that time, Buffett thought he had picked it up. With a big cigarette butt, he decided to start, but he did not expect that the textile industry would go from bad to worse after taking over.

This was Buffett’s worst investment, but he stood up wherever he fell. He didn’t change his name or go bankrupt. He turned a textile factory into an investment company. The stock has changed from 75,000 shares to more than 40,000 shares, which is the most expensive stock.

value investment

After this hit, Buffett’s investment philosophy has undergone a major change, and value investing has begun. Buffett said:

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

It translates to “It is far better to buy a good company at a good price than a good company at a good price.”

Buffett’s investment philosophy is no longer “buy cheap stocks.” Interpretation of the new investment philosophy (value investment) is:

A stock hitting an all-time low is not a reason to buy, but to see if the stock is trading below the stock’s intrinsic value. Likewise, high-priced stocks are not necessarily unworthy investments, and they are also worth investing in if their seemingly high prices do not fully reflect their expected growth prospects.

The essence of value investing theory is:

  • find a good company
  • buy cheap
  • long-term holding

The road is simple, the theory is very simple, the key is to look at the operation.

find a good company

Buffett said to find a good company, and then heavy. Why restock?

Because when the types of stocks you buy reach a certain number, its entire income is about the same as that of the broader market. The final income is similar to that of the broader market, what are you looking for?

All is different from the well-known “don’t put your eggs in one basket”, if we want to outperform the market, we must first find good stocks and place heavy positions at low prices. Looking back at one of Buffett’s holdings, we found that 50% of his assets were only bet on 3-5 stocks.

The latest 13F data released in 2022Q1 shows that Apple’s stock is still Buffett’s largest position, accounting for 43%, followed by Bank of America. source

PS: Attached is Berkshire Hathaway’s position changes in the last 10 years

Of course, Buffett’s daring to hold a heavy position is also related to Berkshire Hathaway’s main business – insurance. Insurance is a long-term and stable business, which means that insurance companies have stable cash flow.

buy cheap

When you are optimistic about the fundamentals of a company, you must find the right time to buy. You have to believe it and don’t listen to the noise outside. One of the more famous cases is American Express .

Here is a famous quote from Buffett:

I am fearful when others are greedy, and greedy when others are fearful.

Of course, it does not mean that we buy at the bottom as soon as the stock falls, which must be satisfied, “it is indeed a good company, and the fundamentals have not changed.”

long-term holding

Economic development has cycles, sometimes long (decades?) and sometimes very short (about 3-10 years). The development of a company takes time, and only companies that reach a certain period can realize dividends. The following chart is the data of the Dow Jones index:

The red area is the cycle of economic recession, and the green area is the cycle of economic development.

When you wait patiently and participate in the time will always bring you great benefits. Investing 200% a year isn’t amazing, but if you can get 20% a year that’s terrible, look at ARK in recent years.

at last

Finally, I would like to remind everyone that investing in companies that you understand should invest in companies that you know. This can also eat the dividends of the times.

In addition, you can also consider buying Berkshire Hathaway shares. If you can’t afford BRK.A, just buy BRK.B, the difference is not big.

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