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Warren Buffett investment strategy

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In this Chapter of Share market Tutorial, we will learn more about Growth stocks using Mr Warren Buffett investment strategy.  I will try to explain Mr Warren Buffett investment strategy using some of his famous quotes and extracts from his letters to investors.

Warren Buffett Investment Strategy for holding period

1. Our favorite holding period is forever.
2. Time in the market beats market timing every time
3. Someone's sitting in the shade today because someone planted a tree a long time ago.
4. Do not take yearly results too seriously. Instead, focus on four or five-year averages.

My definition of investment duration is as below:

• SHORT TERM INVESTMENT - Stock investment with duration less than 3 years.
• MEDIUM TERM INVESTMENT- Stock investment with duration 3 to 10 years.
• LONG TERM INVESTMENT-Stock investment with duration 10 years and more to forever.

I always update this in MY NOTES section for each share to remind me in my Stock Portfolio and Stock Watch list

It is OK for you to have your own definition till you know why and for how long you plan to invest in share of a company. To understand "forever" and "long time" I encourage you to play with numbers on our CAGR Calculator !
 
Real money is made in being invested in a company which will not only exist for decades but also grow for that long.
This can be seen easily in the below table
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But how did Mr Warren Buffett know which companies will perform for that long, answer is actually simple ...
 
Warren Buffett Investment Strategy in deciding business and stocks

1. Only invest in 'simple businesses' that you understand
2. I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.
3. The important thing is to know what you know and know what you don't know.
4. The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.
5. In the 54 years (Charlie Munger and I) have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

If asked to invest between below companies for decades which one will you choose :

1. A company which makes Maggie (Nestle India) or one which makes BOPP films (Cosmo First)
2. A company which makes LUX Soap & SURF EXCEL (Hindustan Unilever) or one which makes Soda Ash (GHCL Ltd)
3. A company which makes COLGATE Toothpaste (Colgate Palmolive) or which makes laminated plastic tubes (EPL Ltd)

If you chose mostly 1st option, there are 5 key things to learn :

1. Simple consumption based business are easy business to predict for decades !
2. Since everyone can do that, such companies will always be market favourite and will be available mostly at premium (high multiples of PE)
3. Investment experts "whatever that mean",  makes investment look too complicated by relating "macro or political environment", economy, base rates, interest rates, EBITDA etc. You on the other hand can always keep it simple.
4. Simple business also covers up for bad management, error in margin of safety !
5. If the business is not simple, if you do not understand, you cannot judge the stocks probability of earning, not in your circle of competence switch to default mode DO NOT INVEST !

But if you invest in simple business can't it be easily copied ? I mean capitalism works that way no ? Let see...

Warren Buffet Strategy on business moats

1. In business, I look for economic castles protected by unreachable moats.
2. The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.
3. Stocks of companies selling commodity-like products should come with a warning label: "Competition may prove hazardous to human wealth."
4. Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.

We have already seen 2 financial ratios for growth stocks.
While competition may be good for society, and companies which believe in innovation, it is rarely good for long term investors !
In any business, competition is a real threat and a great company understands that and it will eventually win over good company in the long run.  (small cap vs mid cap vs large cap stocks).

Let us see what gives such companies an edge over their competitor !
What I found in Mr Warren Buffett selected companies was following :

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So does that mean a great company can be bought at any time and price ? Let us try to answer this !

Warren Buffet Investment Strategy on when to buy

1. Be fearful when others are greedy, and be greedy when others are fearful.
2. The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period or even to look foolish is also essential.
3. The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they are on the operating table.
4. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.

Have told before in best stocks to buy today, no harm in repeating. Investment opportunity do not come everyday. Be patient. Many times fear creep in the market and investors do panic selling. It happened in 2000, it happened in 2008, it happened in 2015 and it happened in 2020.
The reasons may be different but when you find undervalued stocks or find growth stocks at "fair price", go against the mob and invest ! Most retail investors either never stay invested long or when the market crashes and great stocks are selling cheap we let fear takeover and do not invest BIG ! (if share investing is so simple )

Mr Warren Buffett and Mr Charlie Munger wait for years, sometimes decades, for the wanted stock to come to their buying price and then invest BIG !

One question to think is, if he invests for "forever", how he gets the cash again ?

Warren Buffet strategy on getting money and how much to invest

1. Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.
2. Cash combined with courage in a time of crisis is priceless.
3. The Economics of Property-Casualty Insurance With the acquisition of General Re and with GEICO's business mushrooming it becomes more important than ever that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most important of all, the long-term outlook for both of these factors. To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money.

Another important thing to understand here is that Mr Warren Buffett has huge amount of cash due to his investments in Insurance companies. Insurance companies have cash called floats which they keep generating and which Mr Warren Buffett can easily invest. In his own words Insurers receive premiums upfront and pay claims later. ... This collect-now, pay-later model leaves us holding large sums -- money we call "float" -- that will eventually go to others. Meanwhile, we get to invest this float for Berkshire's benefit...Hmm interesting. But another interesting thing is that when opportunity came he invested BIG !
In 1988 he invested almost 1 billion USD in Coca-Cola which amounted to almost 35% of Berkshire Hathaway's stock portfolio. Rest may be simple maths, at even 15% CAGR return for 22 years it will become around 15 Billion USD !

While Mr Buffett may invest in huge BETS I have one advise for all investor.
Do whatever suits you , just don't get burnt ! (detailed at Kashyap how much to Invest)

Let us break our value investing rule and see how much premium one can pay for growth stocks ?

Warren Buffet Investment Strategy on pricing of business

1. It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
2. The three most important words in investing are margin of safety.
3. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.
4. Regardless of the impact upon immediately reportable earnings, we would rather buy 10% of Wonderful Business T at X per share than 100% of T at 2x per share. Most corporate managers prefer just the reverse.

For years I was biased by the Value Investing philosophy of low multiples of PE as told in how to value stocks.
We have already discussed why some easy business growth stocks will always be selling at premium.
To explain how much premium you should pay, I will explain with an example of the most expensive share of company I did not buy Avenue Supermart.

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Warren Buffet views on loosing

1. Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.
2. Losing some money is an inevitable part of investing and there is nothing you can do to prevent it.
3. You only have to do a very few things right in your life so long as you don't do too many things wrong.
4. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.

Whether you like it or you do not like it, some of your stocks will loose !
I have an accuracy of 70-80% ! Even after years of Investment every year I do mistake to invest in some companies which loose.
You can read about Warren Buffett mistakes.

Below is my mistakes for this financial year till now !
There are different types of mistakes :

1. ERROR OF OMISSION - Share which you did not buy when time was right and you decided to wait !
2. ERROR OF BUYING HIGH - You thought it will not go down more
3. ERROR OF SELLING EARLY - DISNEY is a perfect example for Mr Buffett. The company had all the moat he wanted and bought DISNEY in 1966 for 4 Million and sold in 1 year at 6 million. Today its almost more than 17 billion !
4. ERROR OF HOLDING A BAD COMPANY - This is a common mistake I see many doing ! While I avoid Stop Loss, I do book loss when I have found companies have stopped performing ! I do not hold and average bad companies !

Warren Buffet views on trading

1. Derivatives are financial weapons of mass destruction.
2. Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.
3. The stock market is designed to transfer money from the active to the patient.
4. I always find it extraordinary that so many studies are made of price and volume behavior, the stuff of chartists. Can you imagine buying an entire business simply because the price of the business had been marked up substantially last week and the week before? Of course, the reason a lot of studies are made of these price and volume variables is that now, in the age of computers, there are almost endless data available about them. It isn't necessarily because such studies have any utility; it's simply that the data are there and academicians have worked hard to learn the mathematical skills needed to manipulate them. Once these skills are acquired, it seems sinful not to use them, even if the usage has no utility or negative utility. As a friend said, to a man with a hammer, everything looks like a nail.

Mr Buffett doesn't advise of trading, this does not mean he doesn't do it (Warren Buffett secrets & an interesting post). Remember what I told earlier about rules !

For me, I have expressed my views about trading before, please read :

1. Stock trading vs Stock Investing
2. Stock traders follow stock investors
3. Avoid Stop loss
4. Kashyap why NO to stock trading ?

Warren Buffett strategy for Good management and team

1. Honesty is a very expensive gift. Don't expect it from cheap people.
2. You've got to understand accounting. You've got to. That's got to be like a language to you.
3. We are suspicious of those CEOs who regularly claim they do know the future and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to "make the numbers" will at some point be tempted to make up the numbers.
4. My partner, Charlie, says that there's only three ways that a smart person can go broke: liquor, ladies and leverage.
5. Having first rate people on the team is more important than designing hierarchies and clarifying who reports to whom

I still find determining the quality of companies management quiet difficult !

While there is no substitute to financial statement analysis, however I have my own really stupid (non-technical) rules specially for small cap / mid cap companies  :

1. If profit loss table in a quarterly financial report comes after 5 pages, beware !
2. If profit loss table in a quarterly financial report is scanned in low quality, beware !
3. If quarterly financial report has too many optimistic future predictions, beware !
4. If financial report is colorful, too artistic and flashy, beware !

Warren Buffet views on saving, investing and spending

1. Do not save what is left after spending; instead spend what is left after saving.
2. If you buy things you do not need, soon you will have to sell things you need.
3. I have every possession I want. I have a lot of friends who have a lot more possessions. But in some cases, I feel the possession possesses them, rather than the other way around.
4. Stay away from the mentality of using the credit card compulsorily and invest on yourself. Wealth has not created mankind but mankind has created wealth. Live your life in the simplest manner possible.

I personally believe Warren Buffett investment strategy would not be complete  if we do not include his simple personal finance tips he keeps giving ! Yet again I will not explain this as I have detailed this under :

1. How much money do you need to retire ?
2. You are rich
3. Getting rich simplified
4. Why are you investing ?
5. Best stocks to buy today
6. Financial Independence without investing

Warren Buffet's other quotes I love

1. If you don't find a way to make money while you sleep, you will work until you die.
2. An idiot with a plan can beat a genius without a plan.
3. It's not that I want money.  It's the fun of making money and watching it grow.

Warren Buffet views on prediction and forecast

1. The investor of today does not profit from yesterday's growth.
2. Predicting rain doesn't count, building the ark does.
3. Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.

I do not watch TV channels on stock market or investment because hosts are predicting future confidently there ! Most of these predictions are wrong !

However predictions creates an authority and so I too will dare to predict the future of certain companies in my next chapter Finding growth stocks !
With this new learning, let us modify our

Thumb Rules for Stock Investment

1. Default mode is DO NOT INVEST
2. Verify Financial statement source of Information. Best is to do financial statement analysis personally.
3. If you do not understand the financial statement, safely switch to default mode, DO NOT INVEST. Period !
4. Check Financial ratios for fundamental analysis, if not sure, switch to default mode, DO NOT INVEST.
5. Cannot value a stock, switch to default mode,  DO NOT INVEST.
6. Cannot determine probability of earning, NO Margin of Safety, outside your Circle of competency, DO NOT INVEST.
7. Keep track of Shares result Calendar and Corporate announcements in your Stock Portfolio or Stock Watch list.
   Modify MY NOTES as Valuation changes !
8. Keep track of High dividend stocks and Dividend upcoming for investment opportunities.
   Do not ignore dividends, but DO NOT INVEST only for dividends !
9. It's far better to buy a growth stock at a fair price than an undervalued company at a wonderful price.

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