Warren Buffett is easily one of the greatest minds alive, and has made his fortune by investing in quality companies. He picked the best companies over the years and invested in them. Even now, he doesn’t get cocky — every investment he makes, he does his homework.
The market has been crashing in the last several months. However, I continue to invest with the same conviction as ever as I am using the philosophy of Warren Buffett.
“If a business does well, the stock eventually follows.”
Warren Buffett is a value investor. He looks for great companies — more specifically, companies with a competitive advantage such as American Express, Apple or Diageo — and he has the patience to see his investment thesis play out over many years, if not decades. He chooses a company based on its intrinsic value and the company’s ability to continually increase it. Buffett’s holding company, Berkshire Hathaway, most recently purchased HP.
HP has many flaws and I was surprised when Warren Buffett acquired it; however, HP excels in free cash flow. During the past five years, the company has averaged nearly $4bn of free cash flow per year. This is a very healthy indicator, the kind that fits with Buffett’s philosophy.
Let your winners run!
Warren Buffett once said: “Our favourite holding period is forever.” He has gone through many recessions and has held onto his shares, like Coca-Cola, which he has owned since 1980 and accounts for more than 8% of his portfolio today. Clearly, he is a long-term investor. He knows what he buys and he lets his picks run. Obviously, Buffett prefers time in the market over timing the market.
A value stock is a dividend stock???
Warren Buffett encourages buying shares in companies that have solid balance sheets, quality earnings, and strong pricing power. Companies that pay dividends normally meet these principles. And Buffett loves a good dividend stock. The reason is quite simple. Dividend-paying companies are almost always profitable and typically have time-tested business models. Surprisingly (or not), all five of Warren Buffett’s top holdings pay dividends.
Buffett loves the power of compounding and so do I. I use my dividends to buy more shares, and then I use the dividends from these new shares to buy even more shares. Over the long run, I built a dividend snowball!
What have I learnt from Warren Buffett?
My strategy hasn’t changed a bit although a potential recession and stagflation are on the table. I continue to invest periodically, despite the stock market being up or down.
My focus is to buy quality companies and holding them for a long period of time, and therefore the short-term oscillations don’t concern me. I even like to say that in the short term, the market can fall as much as it wants, it will only make me eager to buy at a cheaper price. As Buffett said: “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
