Warren Buffet's Tips For Investors

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Warren Buffet's Tips For Investors

Warren Buffett is one of the world’s richest men and best investors. Whenever he speaks, the world’s investment gurus listen.

Buffett has just sent this year’s letter to shareholders of his listed investment company Berkshire Hathaway. It’s a 9 page analysis of his views of US investment markets and it is always fascinating reading.

The highlights of this year’s letter are;

. never trust the financial statements of companies, and don’t just focus on profit figures, as they can be easily rigged. Do your own homework and focus on broader financial figures.

. understand the dangers of investing with borrowed money. “Leverage is addictive,” he says and recommends a more conservative approach.

. this is the time to invest. “We’re prepared,” he says. “Our elephant gun has been loaded, and my trigger finger is itchy.”

. a recovery in the US housing market will begin within the next year which will help the economy and housing supply companies.

If you want a great insight into Buffett, have a go at reading his biography called Snowball. It’s over 900 pages and is an amazing story. He is certainly a “unique” character and very quirky but his investment track record is astounding… although he was caught out, like so many others, by the GFC.

Snowball is full of his investment words of wisdom.

For instance, Buffett never relies on spreadsheets and investment models in making a decision. He says the key is to try and read the DNA of the chief executive because they are the chief risk officer for the company. In other words, a good chief executive runs a good company and that’s worth investing in.

“I always say you should get greedy when others are fearful and fearful when others are greedy,” is another great investment pearl. Think about it… this is one of those little investment gems to live your life by and very appropriate at this stage of the investment cycle.

He recommends, and always has, the best strategy is to buy a cross section of strong companies across a range of industries and give them time to work.

If you’re not going to be an active investor (and he reckons it’s dangerous for most people to be an active trader) then invest in low-fee index funds. He says it’s not a matter of picking the right stock at the right price, it’s about avoiding the wrong stock at the wrong price.

In the end his sharemarket decision making is based around five fairly fundamental questions.

. Do I understand the business.

Think back to your biggest sharemarket mistakes and how many times have you failed to answer this very basic question. How many times have you invested in a company which you didn’t quite know what it produced, mined or provided. Warren Buffet only invests in companies where it’s clear exactly what they do.

. Is it run by people I admire and trust.

A big mistake we often make is to refer to a company as a corporate entity. We forget a company is made up of a bunch of living, breathing human beings who make decisions and work to produce a product or service. Leading the company is a board and executive team who set the culture for the rest of the workforce, make the decisions and guide the business. Often it’s the quality of that board and that executive team which underpins success or failure.

. Does it have a sustainable competitive advantage.

Standout investment returns are produced by standout companies which often have a standout advantage over competitors. It may be a superior or unique product or service, a delivery system, a marketing strategy or brand… it could be a whole range of factors. But in today’s business and investment environment, it’s that edge over competitors which translates in to success.

. Is it the right price.

We’re talking money here. The best company in the country can be a bad investment if its price is unrealistically high as investors bid up the value to unsustainable levels. Warren Buffet’s patience is a key plank to his success. He’ll identify a good stock and then patiently wait until its price realigns to a sensible level.

. If yes to all the above then do the deal.

In the end it’s all about sticking to quality and spreading your investments over a range of companies on the right track.

After all that, what we really love about him is that he’s worth billions and has basically given most of it to Bill Gate’s charitable foundation to give away. He reckons Gates will do a better job of using it wisely than him.

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