Tags: Benjamin Graham, Berkshire Hathaway, Bill Gates, Investing, Investment Secrets, Warren Buffett

The Investing Secrets of Warren Buffett

By , Money Morning •

Investing icon Warren Buffett is known for the market-beating returns that his company, Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), has returned over the past few decades. His success is due to some very simple investing strategies that he adheres to religiously. Here are 10 of his best:

  1. Think Like an Owner: Buffett got this from his mentor, Benjamin Graham, who counseled investors that a stock is only as good as the company backing it up. Investors too often look at the stock and the company as unrelated things.
  2. Always Seek a "Margin of Safety" in a Stock: In other words, don't just buy good companies - make sure they're selling well below your best estimate for the stock's intrinsic value ... giving yourself a "margin of safety."
  3. Look for a "Moat": Buffett looks for companies with sustainable competitive advantages - essentially a protective "moat" that will allow it to be a leader for decades, rather than mere years.
  4. Focus on the "Inner Scorecard": Buffett once asked: "If the world couldn't see your results, would you rather be thought of as the world's greatest investor but in reality have the world's worst record? Or [would you rather] be thought of as the world's worst investor when you were actually the best?" If you picked the latter, you have an "inner scorecard," meaning you'll be able to ignore Wall Street's "profit-now" mentality to focus on long-term results.
  5. Be a Contrarian: Buffett once wrote: "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
    If you adhere to the concept of the "inner scorecard" - and the Rudyard Kipling admonition to "keep your head when all about you are losing theirs" - you'll be positioned for market-beating returns.
  6. Debt is Dangerous - Avoid Leverage: As the financial crisis demonstrated, debt is dangerous - which is why Buffett once said that "leverage is the only way a smart guy can go broke." For retail investors, this admonition includes buying on margin. Avoid the pitfalls that come with margin accounts ... just don't do it.
  7. Simple Ideas Are the Best Ideas: Buffett once said that he best liked things "that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas." As one journalist said recently, "when Buffett made a killing on PetroChina Co. Ltd. (NYSE ADR: PTR) a few years back, the mis-pricing was so obvious that his only due diligence was reading its annual report."
  8. Never Forget the Ham Sandwich: Former Fidelity Magellan (FMAGX) fund manager Peter Lynch once said that investors should look for companies "that any idiot can run ... because, sooner or later, any idiot is probably going to run it." Buffett says it more uniquely, noting that "a ham sandwich" could run The Coca-Cola Co. (NYSE: KO) because its idea and brand are so powerful. No wonder Coke is Berkshire's top stock holding.
  9. Keep Your Focus: When Buffett and Microsoft Corp. (Nasdaq: MSFT) Chief Executive Officer William H. "Bill" Gates III were asked for the secret of their success, both gave the same reply - "focus." Buffett has spent decades analyzing stocks for hours a day - every day.
  10. Make Time an Ally: Buffett is a huge believer in the power of compounding over long periods. For investors, that translates to three key tenets: Start early, avoid near-term risks (and near-term losses) and patiently let your money work for you.

[Editor's Note: For a related story on the wisdom of investing icons that appears elsewhere in today's issue of Money Morning , please click here.]

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