Warren Buffett’s Investment Strategy, Investing Rules, and How He Made His Fortune

Warren Buffett’s interest in finance and investing started at a young age. He bought his first stock at the age of 11 – Cities Service Preferred Stock, which he eventually sold for a 4.6% gain – and had saved $1,000 to invest by the age of 14. By the time he was in high school, he had already made several successful investments. After studying economics and finance at the University of Nebraska and the University of Pennsylvania’s Wharton School, he went on to study at Columbia University where he was introduced to the value investing philosophy of Benjamin Graham. This would have a significant impact on his investment approach and cement his reputation as one of the greatest investors of all time.

Graham, widely considered the father of value investing, taught a course in security analysis that Buffett attended. Impressed by Graham’s approach, Buffett sought out a job at Graham’s company, Graham-Newman, after graduation and worked with him for several years in the 1950s. During this time, he honed his skills in value investing and developed a deep understanding of the principles that would guide his investments for the rest of his career. Graham’s influence on Buffett is widely recognized and he has credited his former mentor with providing the framework for his investment approach.

In the early stages of his investment journey, Buffett made several successful investments, including in stocks such as GEICO and Rockwood. He had a keen eye for undervalued companies. He also had the ability to see an opportunity from all angles, understanding what each side of the trade was looking for in a given situation, allowing Buffett to find the best position to take. This, combined with his deep rooted appreciation of the principles of value investing, set the foundation for the success he would achieve in the years to come.

In 1956, after years of honing his skills and building a reputation as a successful investor, Buffett launched Buffett Associates, LP, a hedge fund that would eventually grow into the multinational conglomerate Berkshire Hathaway.

Warren Buffett’s investment strategy has remained relatively consistent over the decades, centered around the principle of value investing. This approach involves finding undervalued companies with strong potential for growth and investing in them for the long term. Buffett looks for companies with a durable competitive advantage, such as a strong brand, high barriers to entry, or a large and loyal customer base, and invests in them at a price that provides a margin of safety.

Buffett’s investment philosophy has proven to be a winning strategy, delivering substantial returns for Berkshire Hathaway and its shareholders over the years. He famously has been skeptical of investing in high-risk, high-reward industries such as technology and instead focuses on traditional industries such as retail, insurance, and finance. He is known for making long-term investments, holding onto companies for years or even decades, and avoiding frequent trading. This approach allows him to take advantage of the power of compound interest and gives the companies he invests in time to grow and generate substantial returns.

In addition to his commitment to value investing, Buffett is also known for his long-term focus, avoiding short-term thinking and instead focusing on the long-term growth potential of the companies he invests in. He is famously frugal and avoids overpaying for companies, instead waiting patiently for the right opportunities to arise. This discipline, combined with his deep understanding of the industries he invests in, has made him one of the most successful investors of all time, with Berkshire Hathaway delivering a compounded annual return of over 20% to its shareholders since 1965, roughly double the S&P 500 index’s returns over that time.

Despite the throughline of value investing, Warren Buffett’s investment strategy has changed over his career.

Warren Buffett’s early investment strategy entailed “cigar butt” investing, a term Graham used to describe the process of finding companies that were down on their luck but still had a few puffs of value left. Buffett would invest in these companies, extract what value remained, and then move on to the next opportunity.

Over time, however, his focus shifted towards a more long-term approach centered around finding great companies at a fair price, influenced by the growing size of his portfolio – which made cigar butt investing less and less practical – and by his partnership with Charlie Munger, the eventual Vice Chairman of Berkshire Hathaway and Buffett’s longest-running and most influential partner.

With Munger’s push, Buffett began to focus on companies with a durable competitive advantage and a strong brand, or what he called a moat, while staying in his ‘circle of competence’, avoiding industries and companies he didn’t understand – the most famous example again being technology. He would invest in undervalued companies with strong growth potential and hold onto them for the long term. He also began to focus more on the management of the companies he invested in, placing a premium on strong, ethical leadership. This shift in focus allowed him to take advantage of the power of compound interest and generated substantial returns for Berkshire Hathaway and its shareholders over the years.

Today, Buffett continues to apply this “great company at a fair price” approach to his investments, focusing on companies with strong growth potential and a durable competitive advantage. He remains committed to value investing and continues to seek out opportunities to invest in undervalued companies with a long-term focus. He has expanded his gaze to invest in certain technology companies, showing that he can continue to learn. But his unwavering commitment to this approach, combined with his deep understanding of the industries he invests in, has made him one of the most successful investors of all time.

Warren Buffett is widely known for his investment wisdom and has given plenty of advice over the years on how to be a successful investor. Some of his most well-known principles include the following:

“Price is what you pay, value is what you get.” One of Buffett’s most famous quotes highlights his focus on value investing. He believes that it is more important to focus on the value a company provides, rather than simply its stock price. He looks for companies with strong fundamentals, durable competitive advantages, and a history of growth, and he is willing to pay a fair price for these companies, knowing that their value will increase over time.

“Be fearful when others are greedy and greedy when others are fearful.” This highlights Buffett’s contrarian approach to investing. He often takes advantage of market panics and crashes to buy companies at a discount, knowing that their value will eventually recover. He also avoids overpriced companies, even if everyone else is investing in them, knowing that their value is likely to decrease over time.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” This highlights Buffett’s focus on quality over price. He believes that it is better to invest in a company with a proven track record of success, a durable competitive advantage, and strong growth potential, even if it means paying a fair price, than to invest in a company with a lower price but weaker fundamentals.

Warren Buffett is known for his investment wisdom, doled out in annual letters he writes as Berkshire Hathaway’s CEO and Chairman, as well as in interviews and at Berkshire Hathaway’s annual meeting in Omaha each year. He has established several rules that he follows to ensure success. Some of his most important rules include:

Rule 1: Never lose money. This is considered by many to be Buffett’s most important rule and is the foundation of his investment philosophy. He believes that it is more important to protect capital than to try to make a quick profit, and he is willing to pass up on investment opportunities if he is not confident in the company’s long-term prospects. By following this rule, he has been able to minimize his losses and maximize his returns over time. He emphasizes this so much that he often says, “Rule number 2 is never forget rule number 1.”

Rule 2: Focus on the long term. Buffett is a long-term investor and believes that it is more important to focus on the future potential of a company, rather than its short-term performance. He invests in companies with a durable competitive advantage, strong management, and a history of growth, and he holds onto these investments for the long term, taking advantage of the power of compound interest. He has said that his favorite holding period is ‘forever’.

Rule 3: Know what you’re investing in. Buffett believes that it is essential to have a deep understanding of the industries and companies you are investing in. He takes the time to thoroughly research each investment opportunity, looking at factors such as the company’s financials, competitive advantage, and management team. By following this rule, he is able to make informed investment decisions and minimize his risk.

Warren Buffett’s wealth can be attributed to his disciplined approach to investing and his commitment to following his investment principles. It helped that he started his investment journey at a young age, studying the stock market and reading about investing. He continued to refine his investment philosophy over the years, focusing on value investing and looking for companies with strong fundamentals and durable competitive advantages. This also gave him time to compound his investments over time.

Some of his most successful investments include buying shares of companies such as Coca-Cola, American Express, and Bank of America. He has also made successful investments in companies such as Procter & Gamble, Johnson & Johnson, and Walmart, among others. After acquiring Berkshire Hathaway, he also led the acquisition of a number of companies, including See’s Candies, GEICO, Fruit of the Loom, Duracell, and Dairy Queen, which have added to his business empire.

Buffett’s investment success can also be attributed to his willingness to take a contrarian approach to investing and to hold onto his investments for the long term. He avoids trendy investments and instead focuses on investing in companies that have a proven track record of success and strong growth potential. By following his investment principles, he has been able to consistently outperform the market and generate strong returns over time.

As of February 2023, Warren Buffett’s net worth is estimated to be over $100 billion, making him one of the richest people in the world. Despite his immense wealth, his investment approach has remained relatively unchanged over the years.

Warren Buffett writes a letter to Berkshire Hathaway shareholders every February, attached to the company’s annual report. He also hosts an annual meeting with shareholders in Omaha every May. These are highly awaited events, and Buffett and Munger are known to speak frankly about current and evergreen investing topics in these letters and events.

In Buffett’s 2022 shareholder letter, released in February 2023, he talked about Berkshire Hathaway’s “secret sauce.” He explained how Berkshire finished buying its current positions in Coca Cola and American Express in 1994 and 1995, respectively. Each position cost about $1.3 billion at the time, and produced a combined $116 million in dividends (a 4.5% dividend yield on the full cost at the time). The dividends from those positions are now worth $1.06B, meaning Berkshire receives over 38% of its original investment back in dividends every year.

But, Buffett wrote, “These dividend gains, though pleasing, are far from spectacular.” What have proven more important are the capital gains, as the positions are worth $25 billion and $22 billion, respectively. Making the right decision and holding on to it is, evidently, Berkshire’s secret sauce. Or as Buffett put it himself:

Buffett continues to follow his value investing principles, looking for companies with strong fundamentals and a durable competitive advantage. He has a preference for blue-chip companies with a proven track record of success and a history of steady growth. He also continues to focus on the long term, avoiding short-term trades and instead looking to hold onto his investments for many years.

In recent years, however, there have been some changes in Warren Buffett’s investment approach. The sheer size of his portfolio requires him to invest in larger companies. As shown in his 13F filings, his firm, Berkshire Hathaway has also opened positions in technology companies like Amazon, Taiwan Semiconductor, and most notably, Apple. Apple reflects many of Buffett’s tried and true principles, as most observers would say the company has a strong operating moat and great brand value, to go with strong fundamentals. Indeed, Apple has become one of Buffett’s biggest ever winners on a dollar basis, thanks to the size of his position and the iPhone maker’s continued rise.

Despite these changes, Warren Buffett’s investment approach remains rooted in his value investing principles. He continues to buy oil and gas stocks, for example, and to own large positions of Coca-Cola and Bank of America. Whatever his specific portfolio, he continues to be a role model for investors around the world and his investment philosophy continues to be widely regarded as a blueprint for success.

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