Invest to Win in 2007

Warren Buffet is probably the most successful investor ever. He has accumulated a $30 billion fortune, and consistently outperformed the Dow Index.

There are numerous strategies that can be employed in equities investment, but in this article I intend to concentrate on Buffet’s Long-term buy and hold’ strategy. We can look at Buffet’s approach by analysing one of his quotes

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.’

The key elements from this quote are:

Buy at a rational price. Buffet requires a margin of safety when purchasing a share. In other words if you think the share is only slightly cheap at its current price, don’t buy.
An easily understandable business. I don’t need to know everything about a business that I’m investing in, but I do need to understand how they make their money.
Earnings are virtually certain to be materially higher five, ten and twenty years from now. Look for companies that enjoy a strong competitive advantage and where barriers to entry are high.
If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. The key to success with Buffet’s investment strategy is to buy good companies and then sit back and benefit from strong dividends and share growth.

An interesting aspect of Buffet’s investment strategy is that it does not place a strong focus on diversifying your portfolio. Another of his often repeated quotes is Wide diversification is only required when investors do not understand what they are doing.’ In other words, if you’re not sure how to select individual companies that will outperform the market, then buy an index fund. If, however, you are going to purchase numerous equities, then you should choose based on solidly applied criteria as to which are going to provide the best return, not simply to gain a wide variety of industries.

Buffet’s long-term buy and hold strategy may not be to every investor’s taste. I would recommend that you read up on various approaches, and do your own research before making a purchase. Remember, it’s your hard earned money so you need to be comfortable that you’ve made the best decision, based on all the facts available to you.