Warren Buffett is among the most famous investors worldwide. The so-called ‘Oracle of Omaha’ favours value investing, a strategy that has seen him build a vast fortune.
The 92 year-old investor is the chairman and CEO of Berkshire Hathaway, and has a net-worth of over $100 billion as of November 2022, making him the world’s sixth-wealthiest person.
However, many people might be unaware that Buffett has generated the vast majority of his wealth in his later years. In fact, the legendary investor built 99% of his wealth after the age of 50.
Buffett’s first tip is avoid losing money…
Buffett talks openly about his methods. Here are some of his top tips.
Buffett searches for meaningfully undervalued stocks. And in doing this, he looks for a margin of safety. For example, if a company trades for £2 a share, but he contends the stock’s intrinsic value is closer to £3, then there is a margin of safety of £1. This is also a characteristic that helps him avoid losing money.
In building on this, Buffett always focuses on quality. The Berkshire Hathaway boss says it is better to pay a fair price for a wonderful company than a wonderful price for a fair company. He’s not interested in the risks associated with distressed stocks, but wants to own top-notch companies.
These two investments mantras help reduce the risk of losing money. As he says: “The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.”
…And then there’s taking a long position
Buffett invests as if he’s going to hold shares forever and doesn’t take short positions. It’s not that he doesn’t sell, but his investment positions are long.
But this also highlights the premise for his investments. He doesn’t invest in a stock unless he is truly confident in the long-term prospects the firm offers. If he sells early, maybe he got it wrong.
Moreover, it’s worth remembering that the general trend of stocks and shares is upwards. The FTSE 100 is testament to the upward trend in share prices. The index today is worth four times what is was three decades ago.
So what can I do this year?
There’s no shortage of cheap stocks right now. The majority of UK stocks are down over the past year — and many substantially.
But does this mean they’re meaningfully undervalued? Well, I’d have to do my research and thoroughly investigate the stocks in question. But overall, I’d say that many UK stocks are undervalued right now.
Doing my research can be the hard part. I can look at near-term metrics such as price-to-earnings and EV-to-EBITDA. But I’ll need to compares these among peers in a single sector. There’s also metrics like the discounted cash flow model, which can provide more illuminating data.
One of my top picks is Lloyds. Discounted cash flow analysis suggests that the banking giant could be undervalued by as much as 60%.
More broadly, I feel that if I stick to Buffett’s investment advice, hopefully I won’t go too far wrong in 2023.