Sharing: How To Invest Like Warren Buffett

WARREN Buffett is the third richest person on Earth with a net worth that’s north of US$60 billion (RM258 billion).

I remember in 1992, while interviewing my friend Tan Teng Boo for Malaysian Business magazine, I asked: “Who is Warren Buffett?” Tan told me in enthusiastic detail. In the intervening decades, Tan, a fan and student of Buffett, has racked up a fine record as a fund manager.

In recent months, before global volatility spiked, Tan sold profitable equity positions and raised the cash levels of his domestic and international funds. Initially, as markets continued rising, his moves elicited disdain; but the grumbles gave way to respect for Tan as cash has been the best performing and most defensive asset class in the current global market turmoil! What I have gleaned from studying Buffett’s annual letters to shareholders of his investment vehicle Berkshire Hathaway and several biographies has helped me better serve my financial planning clients. Warren Edward Buffett was born in Omaha, Nebraska, the United States, on Aug 30, 1930. His father was a stockbroker whom the younger Buffett adored. In later years, Buffett attributed the honing of his mental investment framework to two teachers: Benjamin Graham (85 per cent) and Philip Fisher (15 per cent)! Over the last half century, Buffett has used the balance sheet of his company, Berkshire Hathaway, as “a canvas to paint” an economic masterpiece through judicious stock investments and the wholesale purchase of businesses.

Here are four less-ons from numerous Buffett-derived principles which I have taught my clients:

1. Nurture emotional strength When times are good, it is easy for all of us to label ourselves investors. But what separates the men from the boys is the ability to keep a cool head when everyone else is terrified by imploding markets. You see, markets rise and fall… with certainty but unknown periodicity and magnitude! So, as Buffett once wrote: “Unless you can watch your stock holding decline by 50 per cent without becoming panic-stricken, you should not be in the stock market.”
2. Know the difference between value and price The best way to make money is to buy low and sell high. Only those who truly internalise this principle can grow wealthy through investing. On March 16, 1979, Buffett explained in his 1978 letter to shareholders: “We continue to find… small portions of really outstanding businesses that are available, through the auction pricing mechanism of securities markets, at prices dramatically cheaper than the valuations inferior businesses command on negotiated sales.” Today, more than 36 years later, local and global markets are roiling from Chinese securities markets, commodity and currency downturns. Therefore, countless opportunities will arise for you to identify the yawning gaps between intrinsic economic value and temporarily depressed prices.
3. Allocate capital wisely Buffett has long maintained that his one core skill was capital allocation. When he took over Berkshire Hathaway half a century ago in 1965, it was a struggling New England textile maker. He then allocated the dwindling stream of cash flow from the ailing concern into businesses with brighter prospects. He diverted Berkshire’s free cash flow into positions in general insurer Geico and other undervalued listed companies. So, by the time Buffett shuttered the last Berkshire textile plant in 1985 his reinvented investment holding company enjoyed cash gushing in from diversified insurance, retailing, media, banking and confectionery operations.
4. Maintain large cash reserves for stability and opportunistic flexibility In his 2008 letter (published February 27, 2009) to shareholders, Buffett wrote: “I have pledged — to you, the rating agencies and myself — to always run Berkshire with more than ample cash. “We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” So, for the tough road ahead, I encourage you to tap into this incomparable wisdom by studying his Berkshire shareholder letters (www.berkshirehathaway.com/letters/letters.html).

Source : How To Invest Like Warren Buffett