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- warren buffet: smart investor
WARREN BUFFET: SMART INVESTOR
Warren Buffett is the third richest man of the world behind Bill Gates and Carlos Slim. Born on August 30, 1930 at Omaha in the United States (State of Nebraska), this American business man, investor and philanthropist of 80 years old has a fortune estimated to 50 billion US dollars in 2011 (source: Forbes magazine).
His passion for stock exchange investments was transmitted to him by his father, Howard Buffett, who was a stock broker and member of the Congress. After studying at the University of Nebraska and obtaining a master in economy at the University of Colombia, Warren Buffett started to manage stock exchange portfolios in 1958 at the age of 28, by collecting his money and the money of his family and close friends. Within ten years, Buffett’s investors made on average 30% capital gains per year, an exceptional fact because the market at that time was making between 7% to 11%. At the age of 33, Buffett took control of a textile group listed on the Stock Exchange: Berkshire Hathaway, in order to make his following investments.
Among the companies owned by Warren Buffett we can count Coca-Cola, Gillet, the American newspaper Washington Post, and the American bank Goldman Sachs.
Warren Buffett's Investment Strategies:
One of Buffett’s main strategies consists in concentrating his investments in under-valued companies that have a strong growth potential. Buffet barely invests in high-tech companies because he doesn’t have a good knowledge of this particular sector, and because technology evolutions are numerous and very difficult to forecast. He prefers to invest in sectors he understands such as insurance for example. With Berkshire Hathaway, Warren Buffet is the owner of Geico and General Re, two insurance companies that have real sources of fund. All the fund generated by these companies are then distributed to Berkshire Hathaway subsidiaries, in order to allow Buffett to acquire new companies.
What makes Warren Buffett’s strength is that, contrary to others investors, Buffett participates to the management of the companies he owns. Thanks to this, he generates much higher yields than the average.
One of the principles of Warren Buffet’s investment strategy consists in buying shares when the asset values are at the lowest. Buffet created a technique called “Security Margin”, that indicates the difference between the real value of a company and its share value. Buffett prefers buying when the share value is far below the real value of a company, even if he needs to wait a few years for it. Indeed, according to Buffett, an investor needs to stay “inactive” when the Stock Exchange goes bad, or when a company faces temporary difficulties.
Another principle of Buffett’s strategy is to make long term investments, on periods of minimum 5 years. In this way, the share values are more stable, the transaction costs and the tax on capital gain are strongly reduced. Buffett’s goal is too keep these shares for several years in order to multiply their values. Buffett still owns shares of Coca-Cola that he bought in 1988, and which value has been multiplied by 7!
Warren Buffett invests in few companies in order to reduce his transaction costs, and in order to have a better knowledge of each of his companies. The risk is higher when there is few diversification, but as Buffett always invests in companies that generate regular profits, and never invest in companies that are loosing money, Buffet minimizes his risks of loss.
One of Buffett’s strategies consists in buying shares of companies that have few competitors and that are very popular, like Coca-Cola for example. Buffett is convinced that, if a company owns a unique know-how that difficult to copy, and has a dominant position on their market, then their profession is “durable” and is worth investing money in.
When Warren Buffett buys a company, he keeps their managers, even if they are old.
Finally, the last principle of Warren Buffett’s investment strategy is to carry out a deep study of a company’s accounts before buying their shares.
