Warren Buffet’s Early Investment Strategy

warren buffet investment strategy
UNITED STATES - JULY 09: Warren Buffett, chairman of Berkshire Hathaway Inc., attends a lunch break following a session at the 26th annual Allen & Co. Media and Technology Conference in Sun Valley, Idaho, U.S., on Wednesday, July 9, 2008. (Photo by Matthew Staver/Bloomberg via Getty Images)

The Oracle of Omaha they call Warren Buffet because of his almost unwavering skills in predicting the stocks that will grow. Bill Gates very recently celebrated 25 years of his friendship with Warren Buffet and had this to say about the latter.

Warren earned a reputation as the “Oracle of Omaha” for his shrewd approach to investing in business. But he’s equally gifted at investing in people

Warren Buffet is very good at Investing in every part of the business and that includes the owner as well. Warren Buffet started out by giving lectures in his university when he was just 23 years old. He often taught students who were twice his age.

His initial few investments involved getting funds from a handful of doctors who invested $10,000 each and making a profit from the appreciation of that stock. Warren Buffet having run a small hedge fun sort of an operation like this created a corpus for himself to Invest.

Contrary to popular opinion, Warren Buffet traded in a few companies and made profits to build a corpus. In 1962 he started purchasing the shares of a company called Berkshire Hathaway. Berkshire Hathaway was a textiles company that was failing and after purchasing the majority of the company within a few years, Warren Buffet became the owner. This was a failing company, but this would be the base for Warren’s future Investments.

Warren Buffet started investing in different businesses and in 2015 it had revenues of over US$ 210 Billion. So what was Warren Buffet’s early investment strategy when he started off?

When Warren Buffet was 18 years old he read the Intelligent Investor, which provided him most of the principles. Written by Benjamin Graham, this book made famous the concept of Value Investing and gave science to the stock market when many people thought it was gambling.

To understand Warren Buffet’s Investment style better, we break down into these 7 approaches.

  • Stuck to Businesses he understood

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In the early stages of his career, Warren Buffet only invested in companies that he understood. He was one of those people who would pore over the Annual report and try to figure out the state of the affairs of the company. If he had to understand something, then had to know the core underlying functions of that particular business. As late as 2010, Warren Buffet had never touched technology stocks because he didn’t understand the technology and how it worked. This put him at a disadvantage compared to other technology pundits who would know the ramifications of technology that is built. His was more of a traditional approach, of knowing companies really well.

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  • Understanding the Management of the Company

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Buffet was an avid reader of Annual reports. More than anything else, he wanted to find out the integrity of people running the enterprise. He would find out if they over promised and fell short of their goals every time? Or did they have a conservative approach. The way he did this was to figure out all the promises the board had made for the next year and in the next year he would go through the report and see if they have achieved those promises. Actions speak louder than words for Buffet. After a point in time, he would personally go and meet the founders of the company to gauge their strengths and weakness and would Invest accordingly.

  • Finding the Intrinsic value of the company

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The stock market is complicated because unlike buying a bag of chips which is pretty straight forward, with stocks it’s complicated. Let’s put the bag of chips analogy into investing. If you had to buy a bag of chips and suddenly there was news that chips were bad for health and the price dropped and nobody buys it, you would be wary to purchase it too. The stock market is emotion, news driven. It is very difficult to find the value of a company because the price of a stock contains the future earnings of the establishment. Based on his math, Warren buffet is very good at finding the true value of a company.

  • Focus on a very few

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Like Apple, Warren Buffet’s strategy of Investing in stocks is to focus. There is no point in having 30 to 40 stocks that you have half an idea about. It is better to have 5 or 6 stocks that you have a complete idea about. 60 to 80 percent of warrant buffet’s investment would be in 5 or 6 stocks and the rest would comprise the 20 percent.

  • Margin of safety

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Knowing the Intrinsic value of a company should be taken advantage of and Warren Buffet uses a principle from the book called Margin of Safety. Margin of Safety is when you buy a company at a price much lower than the intrinsic value of a company. This means you are getting it at a much discounted price. And this difference between intrinsic value and cost price is the safety zone.

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  • Discipline

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This is a very under-rated quality of any stock market investor. Greed can take over or panic can take over. And if you have swinging emotions, then you wouldn’t do that well in the stock market. If the stock price was going up and if Warren Buffet thought that the company was over valued, he would still sell that stock because that is not what his Investment principles teach him. His Investment principles focus on selling an overpriced stock and buying an underpriced stock. So even when you are doing well and you have to stop something from that happening requires immense discipline. This helps more during the hard times than the easy times.

  • Finding a Moat

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A moat is a ditch filled with water with some crocodiles inside that would prevent armies that are attacking from entering a castle. Warren Buffet kept looking for this business advantage for every company that he invested in. Coca-Cola one of his popular investments has a very distinct business advantage, the brand. It’s very difficult to build a bigger brand name than coke in the world. So while Investing buffet always looked for these business advantages that were hard to build.