Seek An Economic Moat
Perhaps the most important aspect of Warren Buffett’s investment style is his focus on economic moats. This can be in the form of a competitive advantage over industry peers that allows them to enjoy higher margins that are sustainable due to either a lower cost base, or higher price point. As a result, companies with economic moats should be able to deliver higher profitability than their peers and deliver stronger share price growth.
For example, a consumer goods company with a strong brand should have a relatively loyal customer following, while a mining company may have well-located mines that keep its costs down. Both of these companies should be able to enjoy higher margins than their rivals and become the most profitable firms in their respective industries.
Buy When Blood Is Running In The Streets
Although John D. Rockefeller coined the phrase ‘buy when blood is running in the streets’, Warren Buffett seems to regularly apply it. Remember back to the credit crunch; when many investors were panicking and seeking to sell shares in companies with plunging valuations. Unlike the many, Buffett was one of the few investors who was on the offensive and bought shares in a range of companies that have, thus far, proved to have been highly lucrative investments.
While it is human instinct to follow the ‘herd’, Buffett stays focused on the facts and leaves emotions well out of investment decisions.
Seek A Margin Of Safety
Buffett attempts to calculate the intrinsic value of a company but, unlike many investors, seeks to buy it at a sizeable discount. This difference is what he refers to as his margin of safety and helps to maximise capital gains in the long run. A margin of safety also means that Buffett is less concerned with the short term fluctuations of share prices, since he is comfortable with the price he has paid and can afford to patiently wait for capital gains to materialise.
Cut Your Losses
To clarify, Buffett does not sell shares in a company merely because they are showing a loss. Rather, he sells shares in companies that he no longer believes are the best places to invest his capital, with him famously stating that ‘should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks’.
So, in other words, if a share price falls but the company’s long term future still looks bright, hold on to your shares. However, don’t be afraid to book a loss if prospects are poor.
Keep A Substantial Cash Pile
Like many other successful investors and business people, Buffett likes to be very liquid. This means keeping a large amount of cash which, while less efficient than being fully invested, affords him exceptional financial flexibility through which to take advantage of opportunities soon after they arise.
Having a large cash pile also gives him the peace of mind that his fortune of $68 billion will not disappear entirely during a market crash. And, although inflation can devalue cash over time, having that backstop means it is a price worth paying.