What is Warren Buffett's Business Investment Strategy? A guide to Investors!

What is Warren Buffett's Business Investment Strategy? A guide to Investors!

Updated on June 30, 2023 17:52 PM by Sally Harbor

Warren Buffet is one name in the financial world that we constantly hear. He is among the world's richest people, consistently ranking high on Forbes' list of billionaires.

Buffett's net worth is stipulated around $100 billion, according to the statistics revealed in June 2022. 

Warren Buffet

He is best known for being one of the world's largest and most successful investors, along with being a savvy businessman and generous philanthropist, which is why it is not surprising that Warren Buffett's investment strategy has reached mythical proportions.

Buffett follows several important tenets and an investment philosophy that is widely followed around the globe. So please read on to learn more about Buffett's strategy and how he managed to amass a fortune from his investments.

A little background 

Warren Buffett was born in Omaha in 1930. At a very early age, he seemed to develop an interest in the business world and investments in the stock market.  He started his education at Wharton School at the University of Pennsylvania before moving to the University of Nebraska, where he received an undergraduate degree in business administration.

Buffett later went to the Columbia Business School, earning his graduate degree in economics. 

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He began his career as an investment salesperson in the early 1950s but left it later and formed Buffett Associates in 1956 and 1965; he controlled Berkshire Hathaway with his skills. 

Then, in 2010, Buffett and Bill Gates announced that they formed the Giving Pledge campaign to encourage other wealthy individuals to pursue philanthropy.

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Investment Philosophy 

Warren Buffett solely abides by the Benjamin Graham school of value investing. Value investors only look for securities with prices that are very low intrinsic worth.

There isn't a universally accepted way to determine the worth, but it's most often determined by analyzing a company's fundamentals.

Similar to what bargain hunters do, the investors also search for stocks that are believed to be undervalued by the market or stocks that are valuable but not recognized by most other buyers. This approach is also what Buffett abides by, and he has also taken it to another level.

Many value investors do not support the Efficient Market hypothesis (EMH), which suggests that stocks always trade at their fair value, which makes it harder for investors to either buy stocks that are valued less or sell them at inflated prices. Still, these investors do trust that the market will eventually turn in favor of these undervalued stocks. 

However, Warren Buffett is not as concerned with the supply and demand of the stock market, and he is not concerned with the activities of the stock market at all. His main ideology goes, "In the short run, a market is a voting machine, but in the long run, it is a weighing machine," which he had told in one of his speeches. 

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Buffett looks at the company as a whole and chooses stocks solely depending on which has an overall potential as a company. He holds these stocks as a long-term approach which will take some time to boom. He also does not seek capital gain but keenly seeks ownership in quality companies capable of generating earnings.

When he invests in a company, his concern is not whether the market will eventually recognize its worth rather, his main concern is how well that company can make money as a business.

The methodology 

Warren Buffett finds low-priced value by going ahead with some questions when he evaluates the relationship between a stock's level of excellence and its price.

Keep in mind that these are not the only things he analyzes, but a summary of what he looks for in his 7-step investment approach.

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1. The Performance of the Company 

Sometimes, the Return on Equity (ROE) is referred to as the stockholder's return on investment as it reveals the rates at which shareholders earn income on their shares. Buffett often looks at ROE to see whether a company has consistently performed well compared to other companies in the same industry.

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Now, you might be wondering how ROE is calculated or collected. So here's the answer to it. The ROE of companies is collected with the usage of a formula which is as follows: 

ROE = Net Income ÷ Shareholder's Equity

And it is necessary for the investors to not look at just the ROE of the last year of the company; rather, the ROE of the past ten years should be looked at with a brief history before investing. 

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2. Company Debt 

Another key characteristic Buffett considers before investing is Debt-to-equity (D/E), and he prefers to see a small amount of debt so that earnings growth is generated from shareholders' equity as opposed to borrowed money. The D/E ratio is calculated as follows:

Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders' Equity

The resulting ratio shows the proportion of equity and debt the company uses to finance its assets. The higher the ratio, the more debt rather than equity is financing the company.

A high debt level compared to equity can result in volatile earnings and large interest expenses. Sometimes, investors use only long-term debt instead of total liabilities in the above calculation. 

3. Profit Margins 

A company's success depends upon its profits, don't you think?? However, a company's profitability depends on having a good profit margin and consistently increasing it.

This margin is calculated by dividing net income by net sales. Investors should be much more careful before investing and should look back at least five years of profit margins. 

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A high-profit margin indicates the company is executing its business well, but increasing margins mean management has been extremely efficient and successful at controlling expenses.

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4. Is the company public?? 

Warren Buffett only considers investing in companies that have been around for ten or more years; as a result, most of the technology companies that have had their initial public offering (IPO) in the past decade are not on Buffett's list.

He has also stated that he doesn't understand the mechanics behind many of today's technology companies and only invests in a business he fully understands.

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Value investing requires identifying companies that have stood the test of time but are currently undervalued. One should never underestimate the value of historical performance as it is vital in demonstrating the company's ability or inability to increase shareholder value.

However, keep in mind that a stock's past performance does not guarantee future performance.

The main job of Buffett or any value investor is to determine how well the company can perform in the future. Determining this is inherently tricky. But evidently, Buffett is very good at it.

One important point about public companies is that the Securities and Exchange Commission (SEC) requires filing periodic financial statements. It is not that these documents are not helpful or useless.

Rather these can help investors analyze how important company data, including current and past performance, is so they can make important investment decisions.

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5. Commodity Reliance 

Buffett sees Commodity Reliance as an important source before investing. He tends to shy away from companies whose products are indistinguishable from those of competitors and those that rely solely on a commodity such as oil and gas.

But if the company does not offer anything different from another firm within the same industry, Buffett sees little that sets the company apart. 

6. Is it cheap?? 

This is the main aspect when it comes to investing and finding companies. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of value investing. And it's one skill Buffett masters perfectly. 

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To check this aspect and determine the price, an investor must determine a company's intrinsic value by analyzing several business fundamentals, including earnings, revenues, and assets.

And a company's intrinsic value is usually higher than its liquidation value, which is what a company would be worth if it were broken up and sold today. 

And once Buffett is done with determining the company's intrinsic value, he compares it to its current market capitalization, which is the current total worth or price.

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Some of his stocks 

Based on regulatory filings from Buffett's public holding company, Berkshire Hathaway(BRK.A), it is possible to see which stock Buffett has signed off on as good investments as of June 2022; these include:

  • Apple, Inc. (AAPL)
  • Bank of America (BAC)
  • American Express (AXP)
  • Chevron (CVX)
  • Coca-Cola (KO)
  • Kraft Heinz (KHC)
  • Occidental Petroleum (OXY)
  • US Bancorp (USB)
  • Hewlett Packard (HPQ)
  • Nu Holdings (NU)

Buffett also has several large stakes in privately-held companies such as GEICO Insurance and Burlington Northern Santa Fe (BNSF) Railroad.

Also read: 10 Tech Stocks to Buy According to Billionaire Warren Buffett.

Warren Buffett, through his company, Berkshire Hathaway, holds a stake in many large companies such as  Bank of America, Apple, American Express, and Coca-Cola, to name a few. 

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The road to becoming rich 

The road to becoming rich is a slow and steady path. Warren Buffett became rich steadily over a long period, primarily through investing. He started investing at a very young age, at 11, to be precise.

At 13, he started his business venture as a paperboy and sold horse racing tip sheets. Later as an adult, he formed his own company and began investing in companies he believed were undervalued, earning profits.

He also reinvested these profits into more investments, and his wealth continued to grow. He eventually bought Berkshire Hathaway through his value investing knowledge and strategy. 

Is he self-made?? 

If you're wondering that, yes, you are right. The investor mogul is completely self-made. However, he belongs to a fairly privileged background.

His father had his stock brokerage firm and became a U.S. Congressman. This allowed Buffett to attend prestigious schools, such as Columbia University. But he started his own company and made investments that eventually led to his enormous wealth.

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What is the best investment, according to Warren Buffett??

Aside from identifying under-valued stocks based on fundamentals, Warren Buffet has said that the best investment you can make is in yourself.

"There's nothing like working to improve your skills," Buffett said.

In particular, the self-development of interpersonal and communication skills and amassing relevant knowledge are very important in the changing economic conditions. Nothing in this field can be done without them. 

The nature 

We have already talked about how much Warren Buffett is worth. Buffett's investing style is like the shopping style of a bargain hunter. It reflects a practical, down-to-earth attitude.

Buffett maintains this attitude in other areas of his life: He doesn't live in a huge house, he doesn't collect cars, and he doesn't take a limousine to work rather takes a normal car just like all of us. 

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