If there is one name from the world of investing that stands out above the rest, it is without a doubt Warren Buffett.
Warren Buffett’s ability to pick winners year after year, in good markets and bad, has become legend, so much so that his name is even recognizable to people whose only investing experience is a checking account.
His signature firm, Berkshire Hathaway, is one of the largest conglomerates in the world, and his 36% stake in the company has kept him at the top of the charts for the richest people in the world for decades.
This extraordinary background leads many to assume that Warren Buffet has some secret skill at stock-picking or access to privileged information and resources, but this could not be further from the truth. In fact, over the years Warren Buffett has developed a rigorous yet simple system for consistently picking winners, and his key to success is the discipline to stick to this system.
So what exactly is it that Warren Buffett does that makes him the world’s most famous investor? Let’s find out.
Stick With What You Know
You would think that someone with an army of analysts and specialists at his disposal would be prepared to invest in any market anywhere in the world, but you would be wrong in the case of Warren Buffett. This simple rule is as true for him as it is for any other investor. If you leave your comfort zone, you are likely to get burned.
Look to invest in companies with businesses that you understand. All the analysis in the world is useless if you don’t have an intuitive grasp of what makes a company tick. Understanding the nature of a business and the industry or industries that it operates in is essential to evaluating its performance and forecasting its future prospects.
Stick with what you know, and if you are not comfortable with an area or industry, then learn it before buying a company.
Buy the Business
Warren Buffett is a prime example of a classic value investor. That means that he isn’t buying companies because of upcoming technical indicators or on a hot tip on what penny stock is going to run next. Warren Buffett buys a company when he thinks that it operates a sound business with strong prospects for the future.
Value investors take no notice of the day-to-day fluctuations in stock prices, but rather look for companies that are currently undervalued by the market and likely to face a significant increase in price over time as a result of improving performance and prospects. Motley Fool picks are a good example of this.
Hunt for Bargains
Warren Buffett likes to stick with stocks whose current valuation offers what he calls a “margin of safety.” This means that these companies are currently so undervalued compared to their true worth that the stock can’t go anywhere but up.
Even with a sound investing approach and diligent research, there are still many unknowns in the investing world. That is why it is best to wait for the perfect opportunities, rather than take risks on deals that are only marginally positive.
By only buying companies that are selling at bargain rates, Warren Buffett ensures that every stock he picks ends up a winner, no matter how bad his luck may turn in the meantime.
Invest in Good Managers
It is difficult to overstate the importance that Warren Buffett places on good managers. He believes that the management can make or break a company, regardless of how sound the business may be. That is why Warren Buffett is always looking for strong management teams as an essential part of a good stock pick. Companies with managers that fail to meet his high standards are ignored, regardless of how good a pick that company might otherwise be.
Picking Winners Like Warren Buffett
While Warren Buffett obviously has access to experience and resources that the average investor can only dream of, his basic investing principles are actually quite simple, and they offer investors of all stripes some powerful insights into what makes the world’s most successful stock-picker so good at what he does.
Value investing is all about searching through industries that you understand for great companies with strong management teams at bargain prices, and then holding those stocks through good times and bad until they reach their full potential.
It may be a lot of work, but investing like Warren Buffett is definitely a reasonable goal for any dedicated investor.