Even if you don’t know anything about golf, you know the name Tiger Woods. Warren Buffett is that big name in investing — he’s most people’s go-to and inspiration to investors everywhere. Often referred to as the “Oracle of Omaha” in a nod to his Nebraska roots, Warren Buffett is an investing legend, business magnate, and philanthropist.
By the time he was 11, Buffett already bought shares of stock, and by 16 he had gathered more than $50,000 from business ventures and investments. That might not sound impressive by today’s standards, but please remember that Buffet is now 89 years old, so that figure was amassed at a time when the mean family income across the U.S. was just $3,000 per year. His side hustles included selling used golf balls, brokering collectible stamps, and buffing cars.
You’d think that with a start like that he would be a shoo-in for any business school he chose, but his application for postgraduate studies was declined at Harvard Business School. He instead applied to Columbia Business School, was accepted into the program, and was taught by his idols Benjamin Graham and David Dodd.
Warren Buffett is now worth just under $90 billion. Through a combination of corporate holdings, investments, hedge funds, and insurance companies. The bulk of his early wealth stemmed from a strong investment approach that positioned him for wild success.
The basics of long-term value
Buffett’s strategy is a long-term value investing approach passed down to him from Benjamin Graham during his time at Columbia Business School. The foundation of long term value investing relies on the purchasing stocks at a price below their intrinsic value; then holding them until their price reflects the real value of the company.
Intrinsic value, also called fundamental value, is the sensed value of an investment’s future cash flow, expected growth, and risk. Because there are literally dozens of variables that go into the estimate of intrinsic value, the calculation is ambiguous at best.
The pillars of long term value investing
Keep your cool
Don’t let fear and greed change your strategy and never, ever, sell in a panic. The market moves, that’s what it does. By letting your emotions run high and selling when prices drop you’re going against the principals of long term value investing. You do not want to buy high and sell low.
Stay in your lane
Buffet only invests in companies he understands and believes will have an enduring presence over the next decade or so. Interestingly enough, his portfolio is very light on tech stocks — because it is not something he understands fully and will not invest in.
Think like an owner
Take a good, long look at enterprise value, considering debts and all, to get a more vivid picture of the total company. Is it still a good deal just because the price of each share is low? This is where a bit of that nebulous intrinsic value calculation comes into play.
Look at the basics
A long-term investing strategy means investing in companies prepared to endure the bad times and that have a plan for the good times. Pricing power, an influential brand presence, and other competitive advantages can mean a lot more than a high speculative valuation.
Be ready to strike when the iron’s hot
Investment opportunities come along when you least expect them. If one knocks on your door you need to be ready with cash on hand or very liquid assets ready to move. Many investors will tell you about the “one that got away” because they just weren’t ready yet.
It’s not a race
Buffet credits long-term value investing in his success because it harnesses the power of exponential growth. Sustainable profits can pay and reinvested dividends grow wealth. Long-term value investing is designed to be just that, long-term. Overnight success usually takes a few years.
Long term value versus other strategies
While every investor has a different strategy that right for them, most strategies can fit into one of these main types:
As we mentioned, a value investment strategy means to buy stocks that are cheaper than they should be and hold onto them until their value rises. This buy and hold strategy demands a patient investor but if the right call is made, handsome payoffs could be gained. All investors should understand at least the basics of value investing and what is, in essence, delayed gratification.
An income investing, sometimes called “fixed income,” strategy involves buying securities that generally payout returns on a steady schedule. Bonds, dividend-paying stocks, exchange-traded funds (ETFs), mutual funds, and real estate investment trusts (REITs) fall into this category. Fixed income investments provide a steady income with minimal risk — they are a healthy addition to any investors portfolio.
A growth investment strategy focuses on capital appreciation. Growth investors look for companies that exhibit signs of above-average growth, through revenues and profits, even if the share price appears expensive. A relatively riskier strategy, growth investing involves investing in smaller companies that have a high potential for growth, blue chips, and emerging markets. This is a research-heavy approach to investing that is best handled by seasoned investors.
A small-cap investment strategy is for those comfortable with more risk in their portfolio. Small-cap investing involves purchasing stock of small companies with a smaller market capitalization (usually between $300 million and $2 billion). These small-cap stocks tend to have less attention on them because of their inherent riskiness and because institutional investors (like mutual funds) have limitations when it comes to investing in these size companies. Small-cap investing is more for experienced stock investors due to their volatility.
Value investing vs. income investing
The key to income investing is picking companies that are generating stable earnings, pay dividends to their shareholders, and have strong underlying assets or businesses. These sorts of companies are typically mature companies, like utilities and real estate investments.
Income stocks, in general, have much less potential for capital growth than value stocks. Value stocks, in general, offer bigger gains because the shares are priced lower than comparable companies.
Value investing vs. growth investing
The clash between growth and value investing has been going on for years. Past studies have shown that value investing outperforms growth over extended periods of time, while value investors argue that a short-term focus pushes stock prices to low levels. This creates great buying opportunities for value investors.
Growth stocks, in general, have the potential to perform more strongly when interest rates are down. Value stocks, in general, do well in early times of economic recovery.
Value investing vs. small-cap investing
Small-cap companies can be defined as growth or value companies: the growth companies are expected to grow their earnings at above-average rates, while the value companies are undervalued in price based on fundamentals. It is possible to combine strategies, and small-cap investing proves that.
There is no one size fits all approach to investing — your individual investment objectives come into play when choosing a strategy. Warren Buffet has, of course, had tremendous success, but his style may not work for you. Whether you are a value, growth, or income investor, when it comes to putting your investment strategy together, look forward and practice patience.