In December 2019, Warren Buffett’s net worth was a smidgeon below $90bn. In 1985, he gave an interview offering some insights into his investment philosophy and strategy. Back then, he was worth just around $500m.
What he said then, he could have said yesterday. Nothing appears to have changed, except for his bank balance. His methods clearly work!
Here are some extracts from the interview:
Margin of safety and diversification
“If you buy things for far below what they’re worth, and you buy a group of them, you basically don’t lose money.”
Here, Buffett refers to his practice of buying part ownership of businesses when they’re selling cheaply. Sometimes, share prices move below what a company is worth, and that’s when Buffett will pounce and buy some of their shares.
But there’s nothing certain in the world of investing. So, diversifying into the shares of several companies ensures a decent investment outcome overall.
“I would rather value a stock or a business first and not even know the price so that I’m not influenced by the price in establishing my valuation.”
Buffett adopts a business-owner mindset. Share price movements don’t influence his calculations about what a business is worth. However, if the share price understates his estimate of value, he’ll be more likely to buy some shares.
But share price falls alone don’t necessarily signal better value to Buffett. A lower share price can still represent poor value.
The long game and focus
“If I were on Wall Street I’d probably be a lot poorer. You get overstimulated on Wall Street. You may shorten your focus and a short focus is not conducive to long profits. The less static there is… the better off you are.”
Stock market professionals, such as fund managers and stockbrokers, often work to short investment timescales. That attitude often leads to frenzied trading. But Buffett is well known for playing a long game. And he operates with a laser-like focus, often ignoring all distractions.
“It’s a temperamental quality, not an intellectual quality [that makes for a good investment manager]. You don’t need tons of IQ in this business.”
Buffett often talks about the need for patience when waiting for the right opportunity to come along. He’s also known for his ability to stick with his investments through thick and thin when others might get shaken out of a position.
“[My approach] would bore most people, and, certainly, boredom is a problem with most professional money managers.”
If you want excitement, take up a dangerous sport. But when it comes to his investment strategy, Buffett simply buys and holds indefinitely. And when you do that, there isn’t much to do from day to day.
Over the 35 years since, Buffett has served up this advice in many ways. He’s certainly been consistent. And, right now, we have an opportunity in these fallen stock markets to apply his methods and build our own fortunes in shares. Good luck!
