“Warren Buffet’s Investment Strategy“ is something everyone wants to know. And can you blame them? After all, if you’re looking to make money with stock ideas then knowing the investing strategy of the most successful investor ever, probably makes sense. But you might be wondering…
Why am I qualified to tell you about Warren Buffett’s investment strategy? Over the last couple of years, I have read and watched as much material by (and about) Warren Buffett as possible in order to learn more about his investment strategy and approach to stock picking. I have been obsessed with understanding Warren Buffett’s investment strategy.
So while I can’t claim to be an expert on every aspect of Warren Buffett’s capital allocation decisions at Berkshire Hathaway, I do have a grasp of some of his core concepts. And that’s what I hope to share with you today in the blog post…
Warren Buffett’s Investment Strategy Summarized:
Warren Buffett’s Investment Strategy revolves around a couple of key concepts. And while they are simple in theory, diligently applying them each and every day can be emotionally difficult. Nevertheless, here are the core tenets of Warren Buffett’s investment strategy…
- Circle of Competence: Warren Buffett’s Investment Strategy is extremely focused on businesses and investing situations he understands. Some would argue that he has missed opportunities by not investing in semiconductor companies. And he was criticized in the late 90’s for not participating in the dot-com bubble. But obviously Warren Buffett’s circle of competence strategy has kept him focused on what works for him. Staying focused on a small scope of services allows you to become an expert at those things, and keeps him from making costly investing mistakes in other areas.
- Margin of Safety: The “Intelligent Investor” framework practiced by Warren Buffett relies on a margin of safety in all investments. At the beginning of his investment career Buffett took this in the literal sense of trying to buy companies that were trading below their asset value. As Warren Buffett’s investment strategy has evolved though he looks for a margin of safety in other terms (for example he might buy a company that is valued fairly relative to it’s assets but where future growth is being discounted heavily).
- Good Economics: Warren Buffett tries to find companies with good economics. Buffett looks for a “competitive moat” around a business that keeps other competitors from usurping them. Another indicator of good economics he looks for is “pricing power.” Typically a business has good economics if it can pass on cost increases to customers (instead of eating the costs and shrinking margins). Buffett is also looking for high ROE and high ROIC businesses. (Needless to say it’s difficult to explain all of good economics in a single bullet point!)
- Shareholder Friendly Management: When you first come up with your investment strategy it’s easy to underestimate the importance of shareholder friendly management. But having management focused on strong capital allocation and building value for shareholders is critical to Warren Buffett’s investment strategy. And actually, Warren Buffett is the epitome of shareholder friendly value himself in his role at Berkshire Hathaway.
- Hard Work: Warren Buffett’s investment strategy is predicated on constant work. Buffett’s discipline and dedication to capital allocation is unrivaled. I can’t understate this enough.
If you’re not convinced about my knowledge of Warren Buffett’s investment strategies, I encourage you to read and learn more for yourself. Here’s a great place to start if you’re looking to familiarize yourself with the Warren Buffett Investment Strategy:
Warren Buffet Investment Strategy Reading List:
(1) Berkshire Hathaway Shareholder Letters: If you’re looking to learn Warren Buffett’s investment strategy there is no better place to start than with Buffett himself. These annual letters are worth their weight in gold in terms of understanding the Warren Buffett Investment Strategy as he diligently chronicles the expansion of the Berkshire empire year after year.
(2) Buffett by Roger Lowenstein: This is my favourite Warren Buffett biography. It gives a very in-depth look at how Buffett makes his business and capital allocation decisions. And that’s why this first biography of Buffett should be a must-read for any investors interested in adopting the Warren Buffett investment strategy.
(3) The Snowball by Alice Schroeder: The Snowball is a very comprehensive look at Warren Buffett’s entire life. It gives an in-depth view of not only how Buffett came up with his investment strategy, but paints a very detailed picture of all the people (both personal and professional) who had an influence on Warren Buffett.
(4) The Intelligent Investor by Benjamin Graham: This is Warren Buffett’s favourite book on investing strategy. Buffett has said multiple times in interviews that Intelligent Investor gave him the framework on which his capital allocation tactics were based. Buffett has also read Security Analysis over 4 times, which is the more in-depth version of Security Analysis.
Challenge of Replicating Warren Buffett’s Investment Strategy:
It’s easy to read and write about Warren Buffett’s investment strategy. But actually applying the capital allocation strategies of the Oracle of Omaha take more than a little practice. Warren Buffett is incredibly focused and has studied investment strategy his entire life. So what am I trying to say?
You’d be naive to think you can quickly pick up Warren Buffett’s investment strategy just by reading this blog post. If nothing else, you should learn from Warren Buffett that successful investment strategy takes a lifetime of dedication and disciplined work every single day. That’s the real beauty of Warren Buffett’s investment strategy
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