Most investors know of the legendary Warren Buffett. Although Buffett is now well into his 90s, the performance of his company Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) continues to go from strength to strength. As does Buffett's net worth. At current estimates, this is now sitting at US$107 billion and counting.
So it goes without saying that this is a person we should all be taking lessons from on how to invest.
I certainly am. And I'll be using Buffett's wisdom to try and buy ASX shares at deep discounts.
One of Buffett's fundamental principles of investing is that price and value aren't the same things. Just because the share market is telling us that Commonwealth Bank of Australia (ASX: CBA) shares are worth roughly $110 today, doesn't necessarily mean they have a value of $110.
Let's take another example that investors might be a little more envious over. Today (at the time of writing), one share of the US e-commerce giant Amazon.com Inc (NASDAQ: AMZN) is worth just over US$100. But back in February 2015, those same shares were worth just US$19. So are both prices 'fair value'?
I would argue that the pricing Amazon was commanding back then was extremely undervaluing the business. That's why investors have enjoyed more than a 400% return in just eight years. That's a compounded annual return of 23% per annum.
Back in 2008, Buffett said the following in his annual letter to the shareholders of Berkshire Hathaway. Keep in mind that this was written in the midst of the global financial crisis:
…the market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market.
This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions. Long ago, Ben Graham taught me that "Price is what you pay; value is what you get." Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.
Now, recessions and a stock market crash like we saw in 2008 don't come along very often. But that doesn't mean we can't still employ this timeless wisdom today.
Image source: Getty Images
How to buy ASX shares like Buffett
Although the ASX share market has had a very positive start to the year, I still think there are many ASX 200 shares out there that are being priced well below what they are truly worth.
Take the JB Hi-Fi Ltd (ASX: JBH) share price. It's currently trading on a price-to-earnings (P/E) ratio of just 10. That gives the company a fully franked dividend yield of over 6.7%.
Contrast that with CBA shares. CBA is presently boasting a P/E ratio of 20.45, with a dividend yield of just under 3.5%.
Compared to CBA and the broader market, JB Hi-Fi looks like "merchandise that has been marked down" to me. Buffett has shown this method of value investing can reward investors handsomely. That's why I'm still looking for ASX shares trading at deep discounts right now.
