Warren Buffett has made a name for himself as the world's most successful investor. Starting out as a young financial analyst in the 1950s hunting for undervalued companies, which oftentimes had a financial industry background, Buffett has turned his investment vehicle Berkshire Hathaway into one of the world's largest conglomerates, which invested in everything from home construction to rail road companies.
His investing success has made Buffett one of the wealthiest men on the planet: Forbes pegs his wealth at around $64 billion making him the third richest man in the world behind Bill Gates and Carlos Slim.
Most famously, he invested in highly recognizable American companies such as Coca-Cola, Wells Fargo, IBM and American Express. Buffett has repeatedly stated that he doesn't intend to sell his stakes in those four American icons and cornerstone investments indicating that he still remains highly confident in their earnings prospects.
Investors who want to emulate Buffett and his successful value investing philosophy certainly can apply a set of very easy-to-follow principles in order to achieve investment success:
1. Invest when others are too scared
The number one thing that clearly stands out and differentiates Buffett-style value investing is his willingness to invest when others are too scared. He famously coined the phrase "Be greedy when others are fearful and be fearful when others are greedy". This pretty much sums it up. But it is a lot harder to do than it sounds.
During the financial crisis there weren't a lot of people who would have been willing to buy equities at all, especially not in the financial sector. But Buffett, staying true to his own investing wisdom, invested in Goldman Sachs at the height of the financial crisis in 2008.
It was a courageous move and one that paid off. The dire situation of the financial sector and the failure of Lehman Brothers contributed to a massive panic in the industry during 2008 with stocks falling off a cliff. At that point of time, Buffett went all in.
He negotiated for a $5 billion preferred stock stake and demanded a $5 billion warrant position that would allow him to add to his existing preferred equity stake at a price of $115 per share. Since the economy and the financial industry have rebounded strongly since 2008, it certainly seems to have been a very savvy move.
Goldman Sachs' stock price stands at about $170 now and Warren Buffett made a few, cool billions with his 'against the crowd' investment.
2. Simple, quality companies
Another key characteristic Buffett is looking for is, that they must be easy-to-understand, quality companies.
Quality companies in this context means that they must have a strong product and a competitive advantage that allows them to continue to sell ever higher volumes of their products. Many companies Buffett invests in have great earnings records meaning they are able to consistently increase their revenues year over year for a long time.
The best example is probably Coca Cola. The product is successful in constantly increasing sales and earnings and the company sells its products in countries around the globe. Coca Cola benefits from its large size, strong distribution network and high product recognition.
3. Top management
The third ingredient to successful, Buffett-like investing relates to a company's top management. Buffett likes to invest in companies with a management team that takes on an owner perspective and has a long-term view.
The last part of the equation, a long-term view, should never be underestimated. Wall Street is usually obsessed with short-term earnings and wants to see results rather sooner than later.
Warren Buffett, on the other hand, is the perfect antidote to impatient short-term investing and is willing to do anything that needs to be done to get a company into a good shape for the long-term.
The Foolish Bottom Line
Warren Buffett's investment philosophy makes a hell of a lot of sense and is actually quite straightforward: Invest in quality companies with good management that are easy to understand and be prepared to pull the trigger when nobody else wants to.
The most difficult thing about it, is to control your emotions and not to give in to the persistent noise from Wall Street which wants to encourage you to trade and collect your commissions.
Buffett's approach to investing has been proven over many decades and investors surely can learn a lot from it.
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