Some of today’s investors look at the stock market the same way that they look at table games in Las Vegas. They see it as a gamble. Then again, there are other investors that look at the market as a challenge.
In truth, Warren Buffett started out with $100,000 and through his long-term investment strategy and philosophy he was able to use a disciplined approach to turn that money into $30 billion.
Wall Street presents bad situations and successful investors know how to capitalize on this. Buffett particularly likes to buy when the rest of the world is selling.
His overall play is against the people that run the stock market, and he is not interested in playing to the market at all.
Short sided thinking will provide opportunities that most others will avoid. 95% of the investors today trade for the short term and follow “the herd mentality.”
The herd has a tendency to sell stocks when the news is bad and buy stocks when the news is good.
Paying Bargain Prices for Great Companies
Buffett’s investing style follows a “Selective Contrarian Investment Strategy.” After investing for the last 45 years, Buffett uses a strategy that includes purchasing companies that have the ability to survive and thrive during political threats and in any economy. He also looks to buy great companies at bargain basement prices. He tends to avoid industries that are price competitive and he avoids companies that sell products that are price competitive. He likes brand-name monopoly type companies that can raise prices while inflation increases. He also likes companies that have high inventory turnover and large profit margins.
It’s also important to know what not to invest in as well as knowing a good investment.
Buffett’s Investing Philosophy
Buffett has a simple investing philosophy: research the business, wait for the market to undervalue it and then hold the stock for the long-term until the fundamentals change. He always invests in companies that have a major competitive advantage.
He calls this advantage a “wide moat,” and it grants these companies the ability to raise prices without having to worry about losing shares in the market. Buffett does not like to invest in companies that spend heavily on R&D in order to reinvent the business each and every year.
Some of the company types that Buffett would avoid include:
- Internet businesses
- automobile companies
Before purchasing any type of stock, it would be wise to ask yourself the following question: “Will this company be around for the next five, 10 or 20 years regardless of market conditions?” If your answer was yes, then it’s most likely that you have chosen to purchase shares of a company with a wide moat.
Make Investments in Industries That You Understand
For the most part, many new investors prefer to chase dreams and invest in the hot stock tip instead of researching businesses that they better understand. This is a costly mistake that many people tend to make. You’re better off learning all that you can about a company by checking out management’s expectations for growing in the future and company financial statements.
Next, you have to decide if the company is something that you’d be willing to own for the next 5 to 20 years. If you truly believe that the business is worth owning, you have to figure out what it’s worth to pay for that particular stock. Warren Buffett only purchases stock in a company when he believes it is selling at a tremendous discount to the real value. Patience is key to investing success. Buffett prefers to buy when there is a margin of safety and the stock is on sale.
Trade Much Less
Buffett’s main rule in regards to investing is to hold onto a stock for as long as you can unless:
- the price is very high compared to historical valuations
- a better opportunity presents itself
- he realizes that his initial research was flawed
“If you don’t feel comfortable owning the company for 10 years, don’t own it for 10 minutes,” said Buffett.
It’s not just about buying and holding a stock. It’s about buying and holding businesses that will last the test of time, said Buffett.
“Be greedy when others are fearful; be fearful when others are greedy.”
Buffett has owned many of his stocks for decades. He has been able to become one of the wealthiest men in the world through long-term, tax efficient investing.
Over the last 40 years, he has returned nearly twice as much is the S&P 500.