The Oracle of Omaha investment decisions:
To talk about the investment criteria of Warren Buffett we will base ourselves on one of the books published by a person close to his environment. In this way, we will have the peace of mind of having a good source of information.
This book, entitled Buffetology, was written by Mary Buffett, Warren’s ex-daughter-in-law, who after years of getting to know his investment strategies and decisions closely, decided to capture in her book everything she learned from the Oracle of Omaha.
This book discusses the investment decisions, methodologies, experiences, and techniques that led Warren Buffett to accumulate a fortune of more than 115.6 billion dollars and to become not only one of the richest men on the planet but the best investor of all time.
So let’s take a look at what Warren Buffett did to become an investment legend and generate a 15% annual return for more than 20 consecutive years:
1. Warren Buffett leads a frugal lifestyle:
What do you think when it comes to millionaire people? Many envision private jets, expensive watches, and a flashy lifestyle.
However, reality reveals that it is different. In the book The Millionaire Next Door, its authors Thomas J. Stanley and William D. Danko conducted a study with more than a billion millionaires and, in their own words, show that:
“Real millionaires haggle over the price of second-hand cars; pay low taxes; they raise children who are often unaware that they belong to a wealthy family until they reach adulthood; and, above all, they refuse to lead the consumer lifestyle that many of us associate with rich people »
What does all this have to do with Warren Buffett’s investment decisions? It turns out that Buffett is not very fond of proving his wealth, and this is because he understands the concept of compound interest very well.
Why Warren Buffett Likes Driving Beetles:
Here’s an anecdote, which demonstrates Warren Buffett’s ability to look long-term and make good investment decisions that translate into higher income:
“Warren is famous for driving old car models. During the early days of their partnership, he drove a Volkswagen “beetle.” Those who observed this attributed it to a lack of general interest in acquiring material goods.
What people didn’t see is how much compounding influences Warren Buffett’s investment decisions. A car that costs about $ 20,000 today will be worth nothing ten years from now. However, Warren knows that he can earn a 23% CAGR on his investments.
This means that the $ 20,000 invested today will be worth $ 158,518 in ten years. In twenty, they already add up to 1,256,412 dollars, and in thirty, 9,958,257 dollars. For Warren, $ 9,958,257 is too much money to throw away on a new car. “
Learning: Many people think that to get rich you have to get lots of money quickly, but this does not always work like this. You just have to continually achieve above-average rates of return for a long time, as Warren Buffett has done.
Now, in terms of investment decisions in the stock market, deciding which companies to acquire, and the criteria you take into account before investing your money, here are its most important pillars.
2. The importance of investing for the long term:
Contrary to what many investors who are looking for returns on investment in a matter of days or months think, Warren Buffett invests only for the long term. And specifically, it invests in companies whose future profitability and profits can be reasonably predicted and expected.
That is, before investing in a company, Buffett and his team have done the task of analyzing very well all the factors that influence the price of this company, its fundamental value, and how valued it is.
3. Invest in companies with expectations in your favor:
While these types of investment decisions seem logical, it is incredible to see how this is forgotten in the stock market. When it comes to buying and selling stocks, people tend to get emotional, expecting the market to behave as they expect and not as it normally would.
So Warren is quite rational, takes a good look at the company’s figures, and understands that companies whose profits can be reasonably predicted generally have expectations in their favor.
When we talk about a company with expectations in its favor, it means that they are companies that can earn much more money and consequently, buy other companies or improve the profitability of the company and its shareholders.
4. The criteria for investing in a good company:
According to Warren Buffett, these are the four ways to identify that a company is a good investment decision:
- The attractive dividends it pays to its shareholders (or those who invest in them).
- The results and their benefits are generated by the company.
- If the company has a monopoly on the consumer, that is, if people prefer them over their competition.
- Finally, if the management takes into account the interests of the shareholders.
5. The profitability of an investment:
One of the most important investment decisions to consider when buying a stake in a company is the price you pay for a share.
The importance is that depending on the price you pay, determines the profitability or profit that you can obtain from your investment.
Remember that the less you pay, the higher your profits will be. The opposite happens when you pay a higher price since the base on which you calculate the profitability is higher and therefore you must have higher profits.
6. Critical investment decisions:
Unlike many investors, Warren Buffett does not make emotional decisions based on the judgment of other people. He and his team go to the trouble of collecting and analyzing the information necessary to make decisions.
Taking into account point number four, his methodology is based on first choosing the type of company in which he would like to be (specifically the one described in point three), and then he hopes that this will reach the price that fits his expected profitability.
Once this happens, Warren Buffett impacts the world of finance with his investments that are valued at billions of dollars. In other words:
“Warren identifies the girl he would like to date and waits for her to break up with her partner before approaching her”
7. Expectations about the return on your investments:
Based on these investment criteria that you just read, Warren Buffett, the most successful investor throughout history, has understood that when he invests at a certain price in companies with attractive expectations, an annual return of 15% can be achieved. or even more.
And the numbers are proof of this since for more than 20 consecutive years it has achieved this performance, many times beating the Standard and Poor’s index.
8. Manage the money of third parties:
Finally, Warren Buffett understood that if he wanted to become the most successful investor on this planet, he had to receive capital from other people, manage it with his strategies and take advantage of his investment decisions.
This is the reason why Berkshire Hathaway appears, a textile factory born in 1839 and later acquired by the Omaha oracle in 1962. Today, the price of one of its shares is around 300 thousand dollars.
In conclusion, as you could see in this article, each of Warren Buffett’s investment decisions is long-term, with a goal in mind and with the certainty of having data and information to support his movements.