Warren Buffett was ranked by Forbes as the richest man in the world during the first half of 2008, with an estimated net worth of $62 billion. He has made his fortune entirely through investing.
He started off managing money. These days, he controls Berkshire Hathaway (NYSE:BRK-B), a $190 billion conglomerate of wholly owned companies, which also has significant equity stakes in huge companies like Coca-Cola (NYSE:KO), ConocoPhillips (NYSE:COP), and Johnson & Johnson (NYSE:JNJ).
He is widely acknowledged to be the best stock market investor ever.
In an article last week in The New York Times, Buffett revealed that with his own money, not Berkshire’s, he is buying stocks. Having previously been 100% invested in U.S. Government bonds, he is moving out of them and into stocks.
Searching for my first billion
Over the years, I and many others have tried to copy Buffett’s investment style, and his investment strategies. Most, including myself, have not even come close to matching his returns, let alone his wealth. I’m still searching for my first billion, and right now, I can tell you it’s about as far away as Mars.
In his 2007 letter to Berkshire Hathaway’s shareholders, Buffett clearly and succinctly laid out his individual stock-picking strategy. He looks for companies that have ...
- a business he understands;
- favorable long-term economics;
- able and trustworthy management; and
- a sensible price tag.
It’s all very sensible and remarkably simple. The devil is in the details, of course, especially when it comes to assessing a company’s long-term economics.
For example, Buffett used to wax lyrical about the fantastic economics of the newspaper industry, and their competitive moats -- it’s one of the reasons why he first bought shares in Washington Post (NYSE:WPO). Not anymore, as the Internet has changed the economics of the newspaper industry for good. If even Buffett can get it wrong, it’s no wonder us mere mortals can’t replicate his success.
Classic Buffett quotes
Buffett is probably the most quoted investor on the planet. Over the years, he’s provided us with classics like ...
“Risk comes from not knowing what you're doing.”
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.”
“Price is what you pay. Value is what you get.”
Like his stock-picking strategy, the quotes are simple. They make perfect sense. Yet they’ve mostly been theoretical, because Buffett has rarely given direct and unequivocal advice, like “Buy American Express (NYSE:AXP) at $25” or “Sell PetroChina (NYSE:PTR) at $150.” At best, you hear about his buys and sells way after the fact, and often without explanation.
Oversexed
But sometimes, just sometimes, he gives direct and timely advice. According to Wikiquote, the first time Buffett made a public prediction about the stock market was at the bottom of the bear market in October 1974. Forbes asked "How do you feel?” to which Buffett replied, "Like an oversexed guy in a whorehouse. Now is the time to invest and get rich."
Since then, Buffett has made few predictions, and as far as I know, no direct advice on the time to buy or sell stocks.
Until now:
“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”
And Buffett’s reasoning? According to the New York Times article, it’s as simple as “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Follow Buffett or guess?
When Buffett speaks, given that he’s made his wealth from investing, it usually pays to listen. Thousands of ordinary investors like you and I admire the man, trying to learn the secrets of his success and put them into practice so we too can be billionaires. Most of us are not, but at least we can try!
The global credit crisis and forthcoming recession have clearly spooked a lot of people. These are unprecedented times. As an investor, you have two options ...
- Try to guess how long the recession might be, guess whether it will be a V-, U-, or L-shaped recession, guess how it might impact on earnings, and make investment decisions made on those best guesses; or
- Follow Buffett’s advice, and buy now.
I know which option I’m taking.
