Warren Buffett is among the most successful investors of all time. Of course, I could never hope to emulate him — he’s worth over $100bn — but I can look to learn from his teachings.
Thankfully, Buffett hasn’t kept his index-beating strategy a secret. As such, I can use Buffett’s tips to supercharge my portfolio, potentially taking me from nothing, to a portfolio that could allow me to retire early.
Compound interest
Let’s start by recognising that Buffett invests regularly and for the long run. In other words, I need to be prepared to commit regularly — this is important if I don’t have a lump sum of cash to kick things off — and be ready to leave my funds as they grow.
“My wealth has come from a combination of living in America, some lucky genes, and compound interest”.
I might not be American, or have lucky genes, but I can compound. With just £10 a day, I could go from zero to £700k in 30 years. Compounding doesn’t guarantee success, but it’s a strategy I favour for the long run.
Seek value
The Oracle of Omaha invests in top-quality value stocks. Value investing involves selecting stocks that trade for less than their intrinsic, or book, value. Such strategies have consistently outperformed the index over the last century.
The difficult bit is finding undervalued shares. It’s not as simple as buying stocks with low price-to-earnings ratios. We’ve got to do our research, looking at discounted cash flow models, and comparing near-term metrics with sector peers.
Buffett allegedly looks for a sizeable margin of safety, apparently as big as 30% or 50%. This means his valuation of the company would have to be 30% or 50% greater than the current share price suggests.
Buy bad news
The legendary American investor has several sayings about bad news. “Bad news is an investor’s best friend,” he once said, adding that tough times let you buy ‘America’s future’ at a bargain.
Bad news comes along every so often. Sometimes shares tank for a reason, and sometimes it’s an opportunity. It’s about finding those opportunities and using them to boost my portfolio.
There’s plenty of bad news around the UK and our economy right now. Maybe some are overplayed. This is where I can use the bad news to my advantage.
Quality is key
Buffett doesn’t buy stocks he doesn’t believe in. The 92-year-old says he’d rather pay a fair price for an exceptional stock than an exceptional price for a fair stock. Over time, we’ve seen him move, only marginally, away from deep value stocks, and focus more on quality at a discount.
What is quality? That might be for each of us to decide. One obvious answer is blue chip. But to Buffett it likely means more than that. He’s interested in great businesses like Coca-Cola and Apple.
