Warren Buffett’s Priceless Investment Advice


“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett’s approach is both easy to follow and demonstrably successful over more than 50 years. Why try anything else?

Two words for the efficient market hypothesis: Warren Buffett

An interesting academic study (link opens PDF file) illustrates Buffett’s amazing investment genius. From 1980 to 2003, the share portfolio of his holding company, Berkshire Hathaway, beat the S&P 500 index in 20 out of 24 years.

During that same period, Berkshire’s average annual return from its share portfolio outperformed the index by 12 percentage points. The efficient market theory predicts that this is impossible, but the theory is clearly wrong in this case. And “you can look it up.”

Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette (now owned by Procter & Gamble) and Washington Post. Over the years, Berkshire has owned household names such as UPS, Exxon Mobil and Wal-Mart.

Although not every share pick worked out, Buffett and Berkshire have, for the most part, made a mint. Indeed, Buffett’s investment in Gillette increased threefold during the 1990s. Who’d have guessed you could get such stratospheric returns from razors?

The devil is in the details

So buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies and determining what constitutes a reasonable price.

Buffett recommends that investors look for companies that deliver outstanding return on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors.

You can identify companies with moats by looking for strong brands alongside consistent or improving profit margins and returns on capital.

How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase shares at a significant discount to their intrinsic values — as calculated by taking the present value of all future cash flows.

Ultimately, he believes that “value will in time always be reflected in market price.” When the market finally recognises the true worth of your undervalued shares, you begin to earn solid returns.

Do-it-yourself outperformance

Beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values before they’ll be able to capture Buffett-like returns.

In our free email, Take Stock, we explore investing strategies, pontificate on the state of the global economy and what it might mean for your share portfolio, plus much more.

Take Stock is an integral part of The Motley Fool’s Investor Revolution. If you’d like to join us on our campaign to empower individual investors, enter your email in the box below. As you would expect from The Motley Fool, we totally respect your privacy, and we’ll never sell your email onto 3rd parties.

If investing in wonderful companies at fair prices is good enough for Warren Buffett — arguably the finest investor on the planet — it should be good enough for the rest of us.

OUR #1 DIVIDEND PICK FOR 2016...

Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.

Enter your email below to discover the name, code and a full investment analysis in our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2016.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.