Warren Buffett: 5 investment lessons to remember

With a fortune estimated at more than 134 billion euros, Warren Edward Buffett is a reference in the financial world that needs no introduction. Over the years, he has shared with the world some of the best practices that got him where he is today. Discover 5 essential investment tips that you can put into practice..

Who is Warren Buffett?

Warren Buffett is the majority shareholder, Chairman and CEO of Berkshire Hathaway. Born on 30 August 1930, he made his first investment at the age of 10 and is currently the 6th richest person in the world. Despite his success, he still lives in the same house in Omaha, United States of America, which he bought in 1958 for around €30,000.

Berkshire Hathaway's investment portfolio includes big names such as Coca-Cola, Apple, IBM, American Express, General Motors and Amazon. As well as being one of the most iconic figures in the world of finance, Warren Buffett is also a leading philanthropist. He has donated more than $47 billion of Berkshire Hathaway stock to charity. With Bill Gates, he co-founded the Giving Pledge, an organisation that encourages high net worth individuals to donate the majority (i.e. more than 50%) of their wealth to philanthropic causes.

How can you invest like Warren Buffet?

There is no magic formula for investing the way Warren Buffett does. However, there are good practices to follow – and more importantly, mistakes that all investors should avoid. Here are 5 key investment lessons that every investor can learn from the "Oracle of Omaha".

1. Follow the overall picture

Warren Buffet was one of the first to advocate the importance of the intrinsic value of shares - not just their current market value. In a nutshell, the central idea is that the market price of a share tends to mode in the direction of its real value to society. According to this view, if a share is priced below its value to the market, it is undervalued and will tend to rise, and vice-versa.

ow do you calculate the intrinsic value of a share? Buffet himself offers a simple definition: it is the "discounted value of the money that can be extracted from a company over its remaining useful life". Another interpretation is that, although a share is a net asset, it should not be bought or sold according to the volatility of the market, as this would deprive the investor of the opportunity to benefit from the growth of this intrinsic value.

This principle applies from the moment of purchase. When analysing the market, prudent investors should consider not only the state of the company, but also the market in which it operates and the economy in general. All of these factors will affect the intrinsic value of the share.

What to do:

• Análise a saúde financeira da empresa, do mercado em que se insere e o momento económico;

• Try not to react emotionally to short-term fluctuations in the price of your shares;

• Remember that the price of an asset is different from its intrinsic value (its real value, which influences its future price).

2. Investing in companies with long-term competitive advantages

This is another of Warren Buffett's maxims – to pick sectors with high barriers to entry, high capital requirements, exclusive intellectual property or other competitive advantages that make life very difficult for the competition.

Berkshire Hathaway currently owns about 20% of American Express. The investment began in the 1990s and has grown steadily to around €1.2 billion. The reason? According to Warren Buffet, "You can't create another American Express. I could create another shoe store. I could do all kinds of things with hundreds of millions of dollars. But I can't put in the minds of people what is in their minds about American Express." Berkshire Hathaway’s stake is valued at around 21 times the invested capital, or €26 billion.

What to do:

• Assess the competitiveness of the sector;

• Analyse the strength of the company's product or service and the loyalty of its customers;

• Focus on opportunities with sustainable competitive advantage.

3. Examine the management team

Who runs the companies you have in mind for investment? What is their track record in the sector? Do they have a proven track record? These are some of the key questions you need to answer if you want to invest like Warren Buffet.

For example, when Coca-Cola began to struggle in the late 1980s, Buffet didn't let the scepticism of financial analysts stop him. In 1988, Berkshire Hathaway invested 21% of its net worth in Coca-Cola. The investor's faith in the product and the management team led by Robert Goizueta paid off, and the company flourished, making substantial profits. Goizueta went on to become one of the industry's most respected CEOs, transforming one of the world's least essential consumer products into an attractive company for investors. "Nobody loved the Coca-Cola Company more," Warren Buffett, CEO of Berkshire Hathaway and now a former member of Coca-Cola's board of directors, said of Robert Goizueta. "He was a great leader and a great gentleman."

What to do:

• Find out about the administrative and financial development of the company;;

• Find out about the strategic financial plan in place;

• Rely on excellent management.

4. Investing in financial literacy

"Never invest in a business you don't understand" is one of the most mythical investor aphorisms. True to this motto, Berkshire Hathaway did not invest in technology stocks for a long while. It was only in 2016 that it decided to buy shares in Apple.

Many people come into investing with no knowledge of what they are doing. Remember that the best investment you can make is in improving your financial literacy.

What to do:

• Be knowledgeable when you invest to be successful in future investments;

• Don't invest in a company because it's trendy;

• Invest in opportunities you understand;

5. Time is the friend of the wonderful business

"Time is the friend of the wonderful business, the enemy of the mediocre". For Warren Buffett, time is an extremely important factor in investing. And it's easy to see why – a the stock market, as represented by the S&P 500 index of the 500 largest US companies, shows a steady uptrend despite short-term volatility. Since its inception in 1957, the average annual yield is about 9%.

S&P 500 Index – Historical chart of the last 90 years

Source: macrotrends

What to do:

• Take a long-term approach;

• Analyse the history of financial returns;

• Decide how long you are prepared to hold the asset before buying.

Banco Carregosa, investing in your financial goals

These lessons from Warren Buffett can be a game changer in your financial decisions. For more personalised and assertive advice, contact the team of experts at Banco Carregosa. We are committed to your investment success.