Key investment principles revealed by Warren Buffett

Warren Buffett has created his wealth by making investments in various companies including stock markets. At writing of this article, Warren Buffett is the CEO of Berkshire Hathaway. The principles discussed here are revealed by Warren in what he calls Berkshire Owner’s Manual.  

Let’s look at each principle in-depth as follows:

• • Investors should rejoice when the Stock Markets Fall. This should be Great News to them – As per Warren’s advice, investors should be happy to see a sinking stock market. There can’t be a better time to stock up their portfolio with excellent stocks at very cheap prices than the times when stock markets are sinking. At this time, investors should buy as much as they can in falling markets.
  • Invest in Companies with High Promoter’s Holding –Warren says that this is beneficial to the investors as the stakes of owners and investors remain aligned to each other.
  • View Shares as Part-Ownership in the underlying Business – Warren advises stock market investors to see themselves as the owners in the company’s business rather holding a piece of paper in hand which can be sold whenever its price changes. This ownership attitude separates an investor from a speculator and forms the basis of  fundamental stock investing.  
  • Avoid Companies which frequently resolve to stock Issuance/Equity Dilution to raise funds citing that the stock issue is undervalued – Warren’s principle cautions investor against companies that keep on issuing new stock/equity to raise funds to apply in operations.  By such activities, companies are able to show larger asset base and higher sales but they hurt the interests of existing shareholders as their stake is diluted. Warren believes in comparing companies’ performance on per share basis rather aggregate values i.e. Investors should compare companies’ performance on per share sales or assets to assess whether the company is creating or destroying value for the shareholders.

• • Investors should Invest in Debt-free or Low Debt Companies – Warren’s principles indicate that an investor should invest in companies which are conservatively financed and do not carry large debts on their balance sheets. The investor should understand that debt-free companies never go bankrupt.
  • Investors should Never Take Loans to invest in Stock Markets – Warren believes that the risk of taking loans to make some extra money is not worth the effort & stress.
  • Investor should Monitor Business Progress of Companies and not their Stock Price Movements – Warren advises investors to focus on the business performance of companies in their portfolio and ignore their daily stock price movements. In fact, he believes that short-term price movements should be meaningless for investors. Investors should use such movements only to buy shares if prices become attractive.
  • Investor should Check whether management is Creating or Destroying  Shareholders value – Warren believes that if a company is not able to generate wealth for its shareholders from the amount of profits it retains with itself, then it should release the money to shareholders by way of dividends or share buybacks. It would allow shareholders to deploy their funds on their own.
  • Investors should avoid companies which frequently acquire other companies in the name of Diversification – Warren’s Investing Principles warn investors that such activities many times represent managerial hubris where companies’ management tries to achieve their self-aggrandizing motives at the cost of shareholders.
  • When to Sell Stock – Warren believes that if a company is doing well, then its stock should never be sold. Investors should stay invested in companies whose business is performing well, irrespective of their share price.

You can also read: Key Principles to investing in a stock

Bottom Line

Warren Buffet believes in fundamental stock investing. He prefers to invest in conservatively  financed companies which have good long-term prospects and run by honest & competent management. Whenever he finds such a company he likes to hold it until its business prospects are maintained.

Related: Investing quick start guide