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How Buffett Became a Millionaire, the Investing Techniques He Used and So Can You:
Buffet has spent 80 years studying investing and has become one of the world's most successful of all time. He had a lot of financial failures and losses along the way. So it makes complete sense to use his tried and tested techniques. Materially cutting down your learning curve and saving yourself from financial losses.
With that in mind, we want to take you through how Warren became the billionaire investor he is today and the investing techniques he uses.$1,000 invested with Warren Buffett since 1965 would be worth $27 million today.
$1,000 invested in the S&P 500 would be worth only $200,000.
Warren built his initial investing frameworks from his first mentor, Benjamin Graham.
Graham is often referred to as the “Father of Value Investing”. Achieving a compounded annual return of over 20% from 1936 to 1956. Whilst the broader market returned just 12% over the same period. He was Buffett’s professor at Columbia University.
Graham taught Buffett 3 key principles:
Intrinsic Value
Margin of safety, and
Mr Market
1. Intrinsic Value - The Key to Success in the Stock Market
Intrinsic Value = The true value of a company. Not its share price! Finding discrepancies between share price and intrinsic value is where the big money is made.
If a share price = $100
It does not mean its intrinsic value = $100
Intrinsic Value is determined by the analyst (you or me).
Knowing how to determine Intrinsic Value from a company's cash flow and future growth potential is fundamental.
Stocks tend to revert to their intrinsic value over time. Again, finding discrepancies in the market between a stock's share price and its intrinsic value is where the big money is made.
“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."
- Warren Buffett
2. Margin of Safety
It's like, making room for error.
If a bridge needs to hold 10,000kg. You build it to hold 20,000kg = Margin of Safety.
Margin of safety is the difference between the Intrinsic Value of the company and the price you are willing to pay for a stock.
If you calculate a stock’s Intrinsic Value as $100 and use a margin of safety of 30% we would only buy at $70.
“The three most important words in investing are margin of safety.”
- Warren Buffett
"Rule no. 1: Never lose money. Rule no. 2: Never forget rule number 1."
- Warren Buffett
3. Mr. Market (otherwise known as volatility)
Every day Mr Market offers you a price for your shares.
A good mood = a high price. A bad mood = a low price.
They’re just “offers”. It doesn’t mean the shares are worth this and it changes daily.
You must learn to harness the emotions of Mr Market and take advantage of it.
Buy when Mr Market is depressed. Sell when Mr Market is hyped.
“Mr. Market is kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. When he gets really enthused you sell to him, and if he gets depressed, you buy from him.”
- Warren Buffett
These were Buffett’s initial investing frameworks, that set the stage for him to become one of the greatest investors of all time and the wealthiest person in the world at one point.
They are timeless investing principles, that every investor should carry in their arsenal.
However, Buffett added additional investing techniques over time.
In the next post we will show you stage 2 of how Buffett evolved and improved his investing strategy.
Have a great day.
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Would you rather?
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What is your top portfolio percentage?
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The paradox of stocks:
Riskiest in the short term, safest in the long term.
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Almost all good businesses engage in ‘pain today, gain tomorrow’ activities.”
— Charlie Munger
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