I don’t look to jump over 7-foot bars; I look around for 1-foot bars that I can step over. — Warren Buffett
Warren Buffett is widely regarded as the world’s best investor. He started out in 1950 with $9,800 in savings. He worked as an investment salesman and as a security analyst throughout the 1960s; and in 1970 he started work at Berkshire Hathaway, Inc. where he currently presides as Chairman and CEO. The firm was originally a textile manufacturing firm. Through his continued efforts as a purchaser of stocks, and then of entire companies — most of which are large and prestigious —Buffett has built Berkshire Hathaway’s net worth to $250 billion. In 2013, the company reflected an 18% increase in its book value per share.
Despite his sterling reputation and success, Warren Buffett is easy to underestimate or, for that matter, flat-out disregard. When asked the secret of his success in public, the Oracle of Omaha invariably exhibits a home-spun Mid-west humility that could distract a team of Nobel economists armed with supercomputers.
His famous quotes are deceptively simple. They can almost seem like insults to your intelligence: “You only have to do a very few things right in your life so long as you don’t do too many things wrong” or “Rule 1: never lose money. Rule 2: never forget Rule 1.” What are we to make of these catch phrases? Is this all there is to investing. Where are the technicals, the charts, the Fibonacci Numbers? What in the world gives with this Buffett character anyway?
Not to worry. If you’re looking to invest lucratively, you’d be well advised to take Warren Buffett at face value. Everything he suggests he’s done for himself, and on behalf of the shareholders of Berkshire Hathaway. Here are four Warren Buffett rules of thumb you can use to help increase your net worth:
Start with Value — Buffett is a disciple of Benjamin Graham (1894-1976), who was his teacher at Columbia University graduate school. Graham’s book The Intelligent Investor has guided Buffett throughout his career. Graham was a proponent of value investing, a technique for identifying companies with a share price that is underestimated by the investing community. The basic idea flies in the face of the efficient market theory, which says that everything that can be known about a public stock is already known. Let’s say you can identify a public company with a record of 25% growth each year for the last 3-5 years. If the company has good margins, little debt, and is under the Wall Street radar, it’s conceivable its stock is priced at a bargain. What it takes is some diligence and sleuthing on your part to locate such a company. Which leads us to this next Buffett investing rule of thumb:
You Don’t Need to Be an Investing “Expert” to Do Well — Buffett also likes to invest in companies like Coca Cola or Gillette, whose well-regarded brand names allow them to dominate their competition. This kind of domination will assure you of the growth you need year after year in a stock. It should be clear too that you don’t need to do the kind of exhaustive searching for these kinds of companies that you do for companies with an under-valued share price.
Take the Long View, and Don’t Focus on Daily Stock Price Fluctuations — Day traders won’t like this advice. But then you shouldn’t like their advice, either. Warren Buffett was never in it for the quick hit, and nor should you. If you pick sound companies, the day-to-day moves of an emotionally driven stock market shouldn’t bother you. According to CBS News, quoting Buffett’s annual letter to shareholders, “tumbling markets can be helpful to the true investor….” It’s moments like these when you can pick up true value.
Sell at the Right Time — Make a list of the criteria you look for in a company you invest in. When the company’s performance no longer satisfies these criteria, sell the stock. According to Money Crashers, this is precisely what Warren Buffett does. Buffett continues to own shares in only one of the first 20 companies he bought; and that company is Berkshire Hathaway itself.
Investing doesn’t have to be a complex affair. By following these four principles of Warren Buffett — principles he’s observed faithfully throughout his long career — you’ll be off to a promising start.