Warren Buffett’s investment strategy: lessons to learn

Summary 

Who is Warren Buffett? 

Warren Edward Buffett is a business magnate, investor, and philanthropist born on August 30, 1930. Known as the "Oracle of Omaha," Buffett is considered one of the most successful investors in history. From an early age, Buffett demonstrated a natural aptitude for business. He honed his skills through education and mentorship in value investing. 

Buffett transformed Berkshire Hathaway into a diversified conglomerate with investments in insurance, utilities, and consumer brands. His philanthropy includes initiatives like The Giving Pledge, and his annual missives to Berkshire Hathaway shareholders offer golden insights into his observations on the economy and investing. 

Despite his immense wealth (his net worth on November 20, 2023, stood at $120.6 billion), Buffett maintains a frugal lifestyle. He lives in the Omaha home he bought in 1958 and enjoys sit-down meals in takeaway restaurants.  

What is Warren Buffet’s investment philosophy? 

Warren Buffett's investment philosophy is well documented in his books and annual letters to Berkshire Hathaway shareholders. Effectively, his philosophy is grounded in the principles of value investing, which he learned from his Columbia University mentor, Benjamin Graham. Buffett focuses on a company's intrinsic value, which he defines as a business's true worth based on its fundamentals and earning potential. 

Here are some of the qualities Warren Buffett looks for in an investment opportunity: 

Buffett acquires much of his wisdom from reading as he is a voracious reader who believes in continuous learning. He devotes time to studying business, industries, and economic trends to make informed investment decisions while adhering to the philosophical principles mentioned. 

What is Warren Buffett’s investment methodology? 

Warren Buffett's investment strategy doesn't follow a formalized step-by-step process. However, we can distill his approach into several vital principles and strategies. 

Here are six considerations Buffett includes in his investment methodology:

1. Company performance 

Warren Buffett assesses a company's performance using a comprehensive analysis combining quantitative and qualitative factors. This holistic assessment process combines financial analysis, a deep understanding of the business, and a focus on long-term sustainability. 

One of the aspects Buffett looks at is Return on Equity (ROE), which gives insight into how well a company performs compared to others in the industry. It's best to consider a company's ROE history to analyze its historical performance. 

Buffett looks for companies with a consistent and growing earning history and a high return on equity (ROE).  

ROE =                 Net Income                 0  

           Average Shareholders’ Equity 

Other company performance indicators Warren Buffet’s investment strategy considers along with ROE include the following: 

2. Company debt 

Buffett considers a company's debt-to-equity ratio (D/E) when deciding on an investment opportunity. D/E is a financial metric that measures the proportion of a company's financing from debt compared to equity. Buffett prefers investing in companies with smaller debt and earnings growth from shareholders' equity. 

You calculate D/E by dividing a company's total liabilities by its shareholders' equity.  

Understanding a company's debt-to-equity ratio can provide the following financial insights into an investment opportunity: 

3. Profit margins 

Warren Buffett prioritizes a company's profit margins when evaluating investment opportunities. He looks at the company's history of profits, assessing whether they increase consistently. For example, a high-profit margin indicates the company is doing well, while steadily growing profits indicate efficient management. 

Profit is calculated by dividing net income by net sales and can offer the following insights on a business: 

4. How big is the company? 

Another important Warren Buffett investment strategy is investing in well-established companies that have been around for over a decade. Understanding a company's size gives insight into its risk profile, growth potential, volatility, and whether it fits the investor's financial goals and risk tolerance. 

Assessing a company's size and growth history allows investors insight into the following essential considerations: 

5. Commodity reliance

Warren Buffett expresses caution and skepticism about investing in businesses heavily reliant on commodities. He believes many commodity-related investments have no competitive edge, are volatile, and have little control over commodity fluctuations. Additionally, commodity-bound industries are subject to boom-and-bust cycles, increasing their risk profile. 

6. Is it undervalued? 

Warren Buffett is well-known for his affinity for investing in undervalued businesses. His contrarian approach and investment philosophy strongly emphasize finding quality companies trading below their intrinsic value. Investing in undervalued investments offers a margin of safety and generally requires a long-term perspective. 

3 tips for following Warren Buffett’s investment strategy 

The Warren Buffett investment strategy for beginners includes a wealth of knowledge for new and experienced investors.  

Here are three tips for investors who wish to follow his methodology: 

What are some common mistakes to avoid when following Warren Buffett's strategy? 

While Buffett's investing strategy sets clear outlines for investors, there are some common mistakes to avoid. They include the following:  

Is Warren Buffett's strategy suitable for all types of investors? 

While widely respected and successful, the Warren Buffett investment strategy may only suit some investors. His approach can be adapted to suit individual investment styles, but it may still require patience, discipline, and a long-term perspective.  

Here are other reasons why it may not fit all investors: 

The bottom line 

Warren Buffett's investment strategy has proven hugely successful, and he openly shares his wisdom on achieving long-term wealth. Investing using his methodology requires in-depth knowledge, patience, and a measure of opportunism. 

If you’re looking to improve your own investment strategy, it’s best to get expert help. At Unbiased, you can get matched with an advisor who will offer expert financial advice tailored to your unique needs. You can build your wealth under the expert guidance of an SEC-regulated professional.