Warren Buffet is the best stock investor of the 20th century. In the last five decades of the 20th century, he made a fortune starting with a few hundred thousand dollars and reaching more than $50 billion in the early part of 2000s. Yet, he is a very simple and unassuming man who loves to live a simple life and drive a simple car. A few years back, he decided to donate the major part of the money that he had made to his close friend Bill Gates, another billionaire to spend it on education and health in the poor countries.
No doubt, everyone calls Warren Buffet the, “Sage of Omaha.” Now, let’s talk about Warren Buffet’s investing style. Warren Buffet read the famous seminal treatise on investing, “The Intelligent Investor” by Benjamin Graham while still in his teens. He was already investing in stocks at that age. He became a perfect disciple of the Ben Graham. Initially he worked with him and learned a lot from him.
In 1950s, the idea of a stock having an intrinsic value was new and novel. The stock market had started to recover after the close of the Second World War. Warren Buffet practically applied the idea of intrinsic value of a stock in his investing decisions. The problem was there was no set formula for calculating the intrinsic value. Warren Buffet developed his own formula for intrinsic value calculation and applied it before making his stock investing decisions.
He meticulously applied that formula in calculating the intrinsic value of a stock, a value that was inherent in the stock due to strength of the company and the nature of its business but may not be what the market was willing to accept at that time. If the market price of the stock was more than the intrinsic value, Warren Buffet knew it was overvalued and would not survive the test of time. So he would not touch those stocks that had an intrinsic value more than the market price. He would go after those blue chip stocks that had an intrinsic value less than the market price. He knew, this stock would be a bargain stock that would eventually attain its true value.
Now, Warren Buffet is a perfect example of a buy and hold investor who does meticulous research while selecting the stock for investment. He says that you are not investing in a stock but investing in a business. Investing in a stock is like owning part of that business. This makes perfect sense. So when you invest in a stock, you want to see that business grow so that the stock also becomes more valuable.
By investing only in long term, you can help the company achieve its true potential. Once the company achieves its true potential, you also get the reward in the shape of capital appreciation. These days, day trading has become a fad. Day traders just buy and sell stocks thinking of making quick profits in the market. What the market needs is long term investment, so the companies can grow and invest in products that would ultimately create value for the customers. This is what Warren Buffet thinks. Maybe the present stock market crash has been the result of electronic or day trading. No one knows. In a few years, when the experts start to write books on the recent stock market crash and the financial crisis that the world experienced, we will come to know what happened. Warren Buffet has consistently defeated the market by his superior performance. You too can invest like Warren Buffet!