Warren Buffet is the world’s most legendary investor. The man turned a modest sum invested from his base in Omaha, Nebraska into billions. He made his money solely through investing. He wasn’t a producer, an operator, or a manager. He is merely an investor. Don’t get turned off by the word ‘merely’, it was put there just to emphasize the fact that Buffet only invested.
What’s even more remarkable is that this man didn’t even visit the companies he is interested in buying. He didn’t do conference calls or really sleuth the company out physically. He did his research solely by reading their financial statements and other reports. From this purely academic approach, he was able to bet the right way and earn billions.
Some critics say that the market is very intelligent now. Thanks to computers, every single element is factored in by trades. There is really no secret in his approach. He follows a fundamental approach. While many younger traders scratch their heads at this approach, it seems to be working beautifully for Mr. Buffet.
Since his approach is different from the current mainly volatility- and momentum-driven investment philosophies, is he a fluke? In a word-no. There are a lot of key elements in his approach that totally capture the factors that indicate whether a company will go up in value in the future or not. By learning Buffet’s approach, we can see that he isn’t a fluke but just a person who places stock bets in a very intelligent manner.
Focus on value
First and foremost, Buffet’s approach to stocks is that behind each stock is a real company. It is not a mere blip on a screen that has momentum you can trade on. Buffet totally soaks up the individuality of a company by studying its reports and numbers. He figures out its trajectory and core competencies. He also tries to arrive at its real value by assessing what competitive advantages it has that its competition don’t have.
This is a classic value-based approach because it looks for companies that aren’t full valued by the market. Buffet aims to find stocks that are artificially depressed due to market ignorance or boredom or neglect.
Buy and hold… for a long time
Once Buffet identifies an undervalued stock, he swoops in and tends to buy in huge blocks. Then he waits. And waits. And waits. For many modern investors who are used to quick swings and quick sales this long wait might be too much. You only need to look at how well Buffet’s approach has worked for over four decades to see the wisdom of his buy and long-term hold approach.