Buffett’s Investing Secrets

March 31st, 2010

Warren Buffett is the unofficial holder of the “world’s greatest investor” title.
Here are some of his investing nuggets.

The idiot principle
Go for a business that any idiot can run, because sooner or later, any idiot probably is going to run it.

Keep a wide safety margin
A margin of safety simply means buying in at a price well below your best estimate for a stock’s intrinsic value. In other words, don’t just because the companies are great and have strong moats. Buy them when they are great companies selling for good to great prices.

The inner scorecard vs. outer scorecard concept
“If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?”

The false precision trap
“We like things that you don’t have to carry out to three decimal places. If you have to carry them out to three decimal places, they’re not good ideas.” In other words, keep the big picture in mind.

A stock is the right to own a little piece of a business
We frequently divorce a stock from its underlying company, especially when the market is delivering up a volatile stock price. Remember that in the long run, a stock is only as good as the company backing it up. Exactly as how a promise is only as good as the person making it.

“Intensity is the price of excellence”
When asked what the most important key to his success was, Buffett answered “Focus.” Microsoft founder Bill Gates answered the same way. Buffett reached his current heights not only because of his brilliant mind, but also because of a focus that has had him analyzing stocks for hours on end, just about every day, for decades. For the armchair investor this means stick to buying and holding index funds and ETF’s, unless you have the time to dedicate to individual stock picking.

How to become rich
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Remembering the Buffett concept of an inner scorecard, and the Rudyard Kipling admonition to “keep your head when all about you are losing theirs,” can lead to outsize returns as the market sways back and forth.

Leverage
For regular investors, buying stock on margin replicates this risk. Don’t do it.

The “moat” concept
Buffett looks for companies with moats, or sustainable competitive advantages. The strength of Coca-Cola’s moat (its brand) is why he believes a ham sandwich could run it. The stronger a company’s moat, the more likely it will be a leader for decades rather than years.

The Snowball
Buffett’s definitive biography, “The Snowball,” is titled so because it sums up his life in two words. Over everything else, Buffett believes in the power of patiently compounding over time.

This entry was posted on Wednesday, March 31st, 2010 at 9:20 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply

Click here to cancel reply.

Name (required)

Mail (will not be published) (required)

Website