Warren Buffett is generally considered to be the greatest investor in the world, but if you asked him it’s very probable that the down-to-earth Buffett would give much credit to his mentor, Benjamin Graham, for the basic framework that made Buffett so successful. However, it is Buffett’s mentality and his adherence to certain principles that are the real reason for his success.
While there are many different ways that Buffett’s investing principles could be explained (and even multiple different principles Buffett follows, including some found in Benjamin Graham’s books) these are three of the most important ones:
Principle 1: Investments should be chosen on the basis of value, not popularity
It’s simple: if you want to be more successful than the rest of the crowd, then you need to do things differently. Don’t buy a business simply because someone says that it’s good or because everyone else is buying it. Instead, choose investments that are profitable and meet your own criteria.
Principle 2: Investments should reduce the risk of permanent capital loss
Some investing principles teach that risk equates to return, but Buffett has always banked more on the concept that choosing wisely and carefully brings more return than risks. Investments shouldn’t increase risk of permanent capital loss; they should reduce it. After all, the point of investing is to make more money, so there’s no sense in risking what you have.
Principle 3: Take ownership of your company and investments
Buffett keeps more than 98% of his net worth in Berkshire Hathaway stock. Not only does this make his net worth increase in value over time, but it’s also a good reminder to be careful with his investments, and to take ownership of the companies that he purchases. Buffett also actively encourages those who hold stocks in Berkshire Hathaway to consider themselves partial owners of the company. That kind of mentality is important for properly analyzing risks and making the best decisions.