Warren Buffett Investment Philosophy

Warren Buffett’s philosophy can be summarized into key principles:

If you had invested $100 in Berkshire Hathaway when he took over in 1965, you would have about $220,000 today.   He views investing as buying a piece of a business, rather than “renting” shares of a company for the short term.

Buffett looks at business fundamentals and prefers a business that is:

1. simple and understandable.

His purchases are not determined by gloomy economic forecasts, or pessimistic stock market forecasts.  He tends to put fairly large sums of money into things that he knows and management that he trusts.  He doesn’t invest in companies outside his ‘circle of competence’. If you understand the industry, you should not stay out just because he does.  For example, Buffett until recently, has shied away from the technology sector.

2. consistent operating history.

Buffett looks at the following indicators, which include return on equity, changes in operating margins, debt levels, and capital expenditure needs, and cash flow.  Buffett watches Wall Street only to the extent necessary to take advantage of shortcomings of the market.

3. favorable long-term prospects.

A good business does not always mean it’s a good purchase, although it is a good place to look for one.  The best businesses to own are ones that can over time employ large amounts of capital at very high rates of return.

Buffett buys using a buy-and-hold strategy that has financial advantages over other strategies that emphasize short-term trading.  This is because when short-term trading is used, you end up paying tax on the proceeds before they are reinvested.  This results in an erosion of capital over time.

Buffett’s companies generally have a strategic advantage over other companies in its industry. 

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