Warren Buffett still goes to office every day and influences trades at Berkshire Hathaway despite stepping down from the helm late last year.
Over the past six decades of managing Berkshire and navigating the most complex events of the 20th century while delivering strong long-term returns, Buffett has consistently shared his investing philosophy, learnings, and mistakes through Berkshire's annual shareholders letters.
Despite markets and industries evolving rapidly in recent years with the introduction of AI, Buffett's evergreen investment advice still remains relevant in today's dynamic economy.
Buffett on How to Think About Investing
In the 1996 Berkshire shareholders letter, Buffett had stated that intelligent investing is not 'complex,' but it is far from easy. He said one does not need to understand modern portfolio theory or option pricing, but needs to invest in an 'easily understandable' business whose earnings have a high probability of growing over the next decade or two.
'If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes,' Buffett said in one of his letters.
Looking at companies as private businesses to evaluate their economic prospects, leadership, competitive edge, and the cost of investment is more essential than focusing on recent stock performance.
'We are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate,' Buffett noted in one of his shareholder letters. 'We view ourselves as business analysts—not as market analysts...not even as security analysts.'
Stock Price Is Just Mr. Market's Mood On A Given Day
In the 1987 shareholder letter, Buffett had described Mr. Market as a metaphor for the stock market's daily mood swings, which can be driven by emotion rather than fundamentals.
'Mr. Market is there to serve you, not to guide you,' Buffett had noted. 'It is his pocketbook, not his wisdom, that you will find useful.'
Buffett's mentor, Benjamin Graham, widely regarded as the father of value investing, had pioneered the concept. Buffett learned from Graham at Columbia Business School and later worked under him at his investment firm.
According to Buffett, Mr. Market's mood can swing from euphoric optimism to extreme pessimism. When overly enthusiastic, Mr. Market may offer to sell shares at inflated prices, driven by the fear that investors will seize profit opportunities and deprive him of gains. Conversely, during downturns, Mr. Market can be despondent, pricing assets at depressed levels out of fear for the future.
Buffett has observed that 'the more manic depressive his behaviour, the better for you.'
When Mr. Market is euphoric, he overpays for stocks; when depressed, he sells quality assets at bargain prices. The wider the emotional swings, the more opportunities disciplined investors have to buy undervalued assets or sell overvalued ones.
In all, Buffett thinks Mr. Market doesn't mind being ignored because if you don't like his quotation today, he will be back with a new one tomorrow.
'Transactions are strictly at your option,' he had stated.
Value Investing is 'Redundant'
Buffett believes that value and growth are interconnected instead of two different approach paths. 'Growth is always a component in the calculation of value,' he had noted, adding that the term 'value investing' is 'redundant' while questioning what 'investing' is if is not the act of seeking value at least 'sufficient to justify the amount paid?'
He thinks it is 'financially fattening' to pay more for a stock than its calculated value, hoping it can be offloaded soon for a higher price. Value investing involves handpicking stocks with low price-to-book-value and price-to-earnings ratios or a high dividend yield, but these attributes don't determine if a stock price is justified.
His concept of 'owner earnings' could prove to be useful in determining the real value of a business, which focuses on what's left for the company owner and shareholders after deducting all liabilities and expenses related to running the business.
The owner-earnings equation does not yield the 'deceptively' precise figures provided by GAAP, because the average annual expenses for plant and equipment used in operations 'must be a guess' and can be difficult to estimate. However, Buffett considers the 'owner earnings' figure instead of GAAP data for valuation purposes when buying stocks or entire businesses.
Finding Cheap Stocks Isn't Enough
Buffett's value investing principles of buying great businesses at cheap prices is a popular strategy leveraged by investors and hedge funds worldwide.
'If you buy a stock at a sufficient low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing,' Buffett noted in Berkshire's 1989 shareholder letter.
Buffett believes that a cigar butt has one puff left in it and won't offer much of a smoke, but a 'bargain purchase' will make that puff all profit.
He said that this kind of approach to buying businesses is foolish since the initial bargain price will likely not turn out to be such a 'steal after all.'
'Never is there just one cockroach in the kitchen,' Buffett highlighted, referring to his views that problems keep coming up in difficult businesses, and time erodes mediocre businesses that face stiff competition, high inflation, and generate low returns. In contrast, time serves as a compounding force for successful businesses with unique moats.
Buffett had stated his first mistake was buying control of Berkshire Hathaway. Though he knew textile manufacturing was 'unpromising,' he still bought into the company because the price looked cheap. Such stock investments proved rewarding in his early years, but he understood the strategy was not ideal by the time Berkshire came along in 1965.
Trade Less, Diversify When You Don't Understand
In the 1992 shareholder letter, Buffett said that the less you trade, the more patient you can be, which is the most valuable attribute in investing.
'Inactivity strikes us as intelligent behaviour,' he had noted.
In the 1993 letter, Buffett explained that he and Charlie Munger had decided to settle for 'one good idea a year.'
In the same letter, he said that portfolio diversification is for those who do not understand business economics. These investors should own 'a large number of equities and space out his purchases,' which can be done by periodically investing in an index fund.
However, if you understand business economics, 'diversification makes no sense for you... It is apt simply to hurt your results and increase your risk.'
In all, Buffett detailed in the 2007 shareholder letter that Berkshire looks for businesses it understands that showcase favorable long-term economics, trustworthy management, and a sensible price tag.
'A truly great business must have an enduring "moat" that protects excellent returns on invested capital,' he wrote.
Look For Businesses Insulated From Changes
Buffett had noted in his 1996 letter that he and Munger favoured businesses and industries unlikely to experience major change with operational and growth clarity up to two decades into the future. Both also encouraged new ideas, products, and processes.
'As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavour but prefer to skip the ride.' The top example is Coca-Cola.
In 1996, Buffett claimed he looked at the company's shareholder report from 1896 to find it had already formulated and followed its 100-year growth plan, while the core product had not changed at all.
As he wrote in his 2011 letter: '"Buy commodities, sell brands" has long been a formula for business success.'
Disclaimer: Our digital media content is for informational purposes only and does not constitute investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks, and past performance does not guarantee future returns.
Originally published on IBTimes UK
© Copyright IBTimes 2025. All rights reserved.
