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.

As a result, I have more money in Berkshire Hathaway (NYSE:BRK.B) than any other business. Having a lot of money in one business brings risk, but it’s a situation that I’m very happy with. 

It’s not just Buffett that I think makes Berkshire a great investment. It’s the way the company is run and the competitive advantage it has.

Investing like Warren Buffett

A lot of the time, investing like Warren Buffett is about working out which stocks to buy. It’s well known that the Berkshire Hathaway CEO has distinctive criteria for identifying stock opportunities.

Copying the Oracle of Omaha is difficult, though. There are two main reasons for this. 

First, Buffett has (in my view) some unique attributes. Chief among these is his patience and temperament.

The secret behind Buffett’s investment success, as I see it, is his ability to wait for the best opportunities. That’s difficult for investors like me who haven’t been investing for 60 years.

Second is the fact that Buffett has access to a unique source of investment capital. The key to Berkshire’s success is the way that its insurance business generates cash.

Insurance

Berkshire Hathaway owns a number of insurance businesses. These work by collecting premiums in exchange for providing cover against risks. 

One way for insurers to make money is by paying out less in claims than they make in premiums. But this isn’t their main source of income.

Insurance companies also invest the premiums they take in. This way they can generate returns before paying claims.

This means that its insurance operations give Berkshire access to capital to invest. When the insurance business collects premiums, Buffett can invest these to generate returns.

Berkshire’s big advantage

This structure is true of insurance companies in general. So why is Berkshire Hathaway so special?

Unlike other insurers, Berkshire invests its insurance premiums in common stocks and businesses. Other insurers typically invest most of their premiums in bonds.

Since stocks and businesses typically produce higher returns than bonds, this means that Berkshire outperforms its insurance competitors.

The next question is why Berkshire’ competitors don’t invest their premiums in stocks and businesses, rather than bonds? The answer is that they can’t. 

Berkshire is able to maintain a big stock portfolio because of the huge cash reserves that protect its underwriting. Other insurance companies just don’t have this and it’s hard for them to generate it.

In order to build a big cash base, an insurer needs to take in a lot of premiums and invest them well. But in order to do that, they need a big cash base to protect themselves from losses.

This is why Berkshire Hathaway has such a big advantage over its competitors. There is risk associated with owning stocks over bonds and there’s risk of overpaying to acquire a business, but I think that Berkshire’s competitive position is unrivaled and it’s why I’m happy to invest a significant sum in the business.