Warren Buffett has amassed a $141bn fortune by pursuing a dedicated investment strategy for decades. I imagine most investors, like me, would be happy to enjoy a tiny fraction of his stock market triumphs.
Fortunately, the billionaire isn’t secretive about how he accumulated his enormous wealth. The Oracle of Omaha has readily given advice and outlined the reasoning behind his investing philosophy.
Let’s explore some of Buffett’s golden rules for investing success.
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Never lose money
The first rule of an investment is don’t lose [money].
Unfortunately, it’s easy for new investors to be lured into purely speculative investment strategies with the promise of getting rich quick.
I prefer to follow Buffett’s approach instead. In essence, that means I only invest in high-quality companies for the long term. I need to understand the business models and control my emotions amid inevitable market volatility.
The stock market isn’t a guaranteed way to make money, but some strategies are superior to others in my view. Ultimately, I’m an investor, not a gambler.
Invest in wonderful companies
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
It’s worth looking at Buffett’s approach to value investing. Finding undervalued shares to buy is a great way to make good stock market returns, but I don’t invest in a company just because it’s cheap.
Metrics such as the price-to-earnings (P/E) ratio and price-to-sales (P/S) ratio are useful guides to a stock’s investment appeal, but some companies deservedly trade at a premium.
For instance, AstraZeneca is one FTSE 100 company I invest in because I believe it’s a very innovative pharma business with a promising pipeline of potential new drugs.
AstraZeneca shares trade at a P/E multiple over 41. They’re more expensive than most FTSE 100 stocks, posing a risk to future returns if the pipeline fails to live up to expectations.
However, on balance, I see this as a case of a wonderful company trading at a fair price.
A long-term approach
Our favourite holding period is forever.
Finally, there’s nothing more Foolish than adopting a long-term investing approach. I only enter positions when I’m comfortable holding a stock for years, if not decades.
This maximises my chances of making a positive return and encourages me to think clearly about which businesses will thrive well into the future.
The ultimate Warren Buffett stock
If investors are inspired by Buffett’s philosophy, one stock that merits consideration is the billionaire’s own company, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).
Berkshire Hathaway offers shareholders exposure to publicly listed equities (28% of its asset allocation) as well as private equity (60% of its assets). A huge net cash pile makes up the remaining 12%.
Public stocks Berkshire owns include the likes of Apple, Bank of America, and Coca-Cola. The portfolio’s private portion is concentrated in insurance and diversified across other sectors, ranging from retail to railroads.
Central to Berkshire’s investment appeal is the stellar management team. Granted, Buffett’s no spring chicken at 93. His eventual departure poses risks for the share price and overall approach.
Nonetheless, the man next-in-line — Greg Abel — is a Berkshire veteran and I’m optimistic he can emulate Buffett’s success when the legendary investor and CEO is no longer with us.
