Warren Buffett is arguably the greatest investor alive today. He recently celebrated his 90th birthday as the fourth richest person in the world with Forbes estimating his net worth at $82.3 billion, this is more than the net worth of Tanzania! What is his trading strategy and how can we follow his phenomenal success?
How did he get rich?
After graduating from Columbia Business School he started his career as an investment salesperson. Less than a decade later he was controlling Berkshire Hathaway. Buffett’s company Berkshire Hathaway would shock you with some of the mega-companies. in their investment portfolio. The portfolio holds stakes in 44 companies summing to $207 billion. In fact the top five in his portfolio are the biggest names in America and perhaps the world. Here they are:
- Apple (NASDAQ: AAPL) $89.4 billion
- Bank of America (NYSE: BAC) $22 billion
- Coca-Cola (NYSE: KO) $17.9 billion
- American Express (NYSE: AXP) $14.4 billion
- Kraft Heinz Co (NYSE: KHC) $10.4 billion
What is his strategy?
Buffett follows the Benjamin Graham school of value investing. They look to invest in securities with surprisingly low prices compared to their worth. By focusing on stocks which are undervalued by the market, using the efficient market hypothesis, the market will eventually trade the stock at a fair value, thus making the investor profit. The idea is that the stock market will catch up to match the stock value of a corporation to its intrinsic value.
The key part of Buffett’s investment strategy is finding companies that are undervalued. You must judge a company’s intrinsic value through analysing fundamental data, going through financial statements, profit margins and records of debt. By comparing the intrinsic value to its current market capitalisation you can determine if a company is undervalued. Buffett took a holistic outlook to decide which companies to invest in, ignoring how the stock performs in markets and instead looking at the companies’ potential. He investigated companies as a whole including company performance, company debt and profit margins. Buffett fundamentally invests in companies that have unrecognised potential that will earn him profit through an organisation’s long-term success.
Historical success will indicate if a company is worth investing in, the tricky bit is determining whether this success will continue. Buffett and his team invest in public companies as this gives them access to financial statements to base their investment decisions on. He tends to put his money into innovative products and services, those that stand out from competitors. This competitive advantage demonstrates how a company can succeed. Taking principles from ecology, it is the species that has its own niche that will perform best over time and this is true for any company.
Use Buffett’s strategy in your trading plan and test whether his theories work.
Though Buffett’s investment style seems straight-forward and logical, the particulars are something we are unlikely to ever know. That is what made his fortune but it might not necessarily be how you make yours. BullBear offers a route into investing successfully from a platform to start you off trading risk-free to comprehensive tutoring on how to trade successfully. Check us out here.