Warren Buffett is a man worth listening to. Through decades of successful investing he’s become the world’s sixth-richest man (according to Forbes) with a personal fortune of around $100bn.
I follow the philosophies of the Berkshire Hathaway boss very closely when buying shares. Here are four I think could help me build a money-making shares portfolio.
Value is important…
One of Buffett’s key investing tips is to buy shares that are undervalued by the market. He famously commented that “whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Seeking value isn’t just about buying stocks with low price-to-earnings (P/E) ratios. Indeed, Buffett pays little attention to share prices. These are vulnerable to rapid changes in market supply and demand that bear no relation to a company’s investment potential.
Instead, the billionaire investor tries to work out the intrinsic value of what a company is worth. There is no set formula for working this out. However, he works out value based on a company’s long-term earnings power.
… but quality trumps all
Speaking of which, Buffett has built his fortune on buying companies he’s prepared to hold for decades. Another one of his pearls of wisdom is that investors should “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
What this means is only purchasing quality companies that can stand the test of time. Even companies that are dirt-cheap should be avoided if they don’t look likely to perform strongly beyond a few years.
Accordingly, the Berkshire Hathaway boss claims that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Splash the cash when markets crash
Perhaps Buffett’s most famous quote is to “be fearful when others are greedy, and greedy when others are fearful.” Buying stocks on the dip can be a wonderful way to build wealth by trusting that a beaten-down company could soar in value during a recovery.
Such opportunities are particularly plentiful during stock market crashes. As Uncle Warren says: “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.” His advice during such periods also includes: “Rush outdoors carrying washtubs, not teaspoons.”
The thing with market crashes is that they are driven by emotion rather than logic. As a consequence, investors often rush to sell everything in sight, including robust companies along with the duds. This provides an opportunity for eagle-eyed investors to exploit.
Don’t beat yourself up
Like in other areas of life, share investing often doesn’t go to plan. But the key to building wealth with stocks is to learn your lessons, focus on the positives, and to keep going.
Buffett wisely said that “as in the case with marriage, business acquisitions often deliver surprise after the ‘I do’s.” But by carrying on after disappointments (what he calls “dumb purchases”) he’s become one of the planet’s richest men.
It’s highly unlikely I’ll make the sort of money that Buffett has amassed down the years. But by following some of his key principles, I think I could make life-changing wealth.