Why Does Buffett Focus on 4 Things?

If you're like me, the past couple of years have been painful and scary. I've had to question just how stock investing fits into my total financial picture and reassess my expectations for retirement. But they've also been highly educational years, chock-full of useful lessons I will carry with me the rest of my life. Today, I want to share with you one of the most important of those lessons -- one I'm confident will help me, and you also, as we continue our journey toward financial independence.

Stuff happens
When things were really scary in early 2009 and companies like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) were imploding, it was comforting to hear words of wisdom from one of history's greatest investors. Warren Buffett himself was stinging, having lost more than $25 billion at one point.

Yet in his annual report, he reminded his Berkshire Hathaway (NYSE: BRK-A  ) shareholders that our country had faced far worse, including the Great Depression and years of 15% to 25% unemployment, a dozen or so recessions, "virulent" inflation, and two world wars (one of which we appeared to be losing -- imagine how that rocked the market!).

Not only have we overcome them all, Buffett pointed out, but our standard of living has increased dramatically -- nearly sevenfold in the last century. There were innovators every step of the way: Ford (NYSE: F  ) in automobiles, ExxonMobil (NYSE: XOM  ) parent Standard Oil in energy, IBM (NYSE: IBM  ) in computing.

With that in mind, then, you and I should have no doubts that we'll overcome the current craziness as well, and that over time our standard of living and the stock market will continue to rise. As Buffett says, "America's best days lie ahead."

Here's what's important
Buffett admits he can't predict which way the markets will move in the short term -- and he is quite certain no one else can, either. Instead of worrying about the short term, he and partner Charlie Munger focus year after year and decade after decade on four simple goals:

  1. Maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
  2. Widening the “moats” around Berkshire's operating businesses that give them durable competitive advantages;
  3. Acquiring and developing new and varied streams of earnings;
  4. Expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered exceptional results for Berkshire.

Berkshire Hathaway is a core holding in Motley Fool Stock Advisor based not only on Buffett and Munger's past record, but also because of their incredible understanding of what it takes to create wealth in the long term. Their vision and discipline led them to such winners as Coca-Cola (NYSE: KO  ) and American Express, and have helped grow Berkshire's book value an amazing 20% annually over the past 45 years.

This is Buffett's gift to us, and our lesson today: Bad times will come and go with surprising frequency over our investing lifetimes, but if we stay focused on sound financial factors and buy when the buying's good, we can gain financial independence. That's why Buffett focuses on those four things and ignores all the short-term wailing and caterwauling -- and his 20% annualized returns stand as a strong testament to his methods.

At Stock Advisor, we're excited about Berkshire and seven other companies that have the managerial vision and financial strength to outperform for the long term. These are our “Core” companies, recommended for your portfolio. You can see them all over the next 30 days with a no-obligation free trial. Here's more information.

Rex Moore reminds you those grapes were probably sour anyway. Of the companies mentioned here, he owns shares of Berkshire Hathaway. Berkshire Hathaway, American Express, and Coca-Cola are Motley Fool Inside Value recommendations. Ford Motor is a Motley Fool Stock Advisor choice. Coca-Cola is a Motley Fool Income Investor pick. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2010, at 11:57 AM, Buffetnomics wrote:

    Mr. Buffet has an investment plan all mapped out for the future with perfectly calculated moves along the way just like a chess master he is already at the end of a winning game in his mind which is actually way down the road in the future. BRAVO!

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