A Few Thoughts on Buffettology

I have followed Warren Buffett for a number of years now. Whilst I don't think his investment strategy is totally suitable for my own situation I have learnt a lot from him. The following notes summarise the key components of Buffet philosophy which I like to keep by my side. I will add to and edit this from time to time.

1. Buy Businesses not Stocks. When buying highly liquid stocks it is easy to get lazy and think that "if I don't like it I'll just sell". But if you owned the whole company a "greater fool" might be hard to come by. Buffett buys on the basis that he would be happy holding for 10 years even if the market was closed. This is a great way to focus your attention on the underlying business fundamentals rather than the daily share price.


2. Focus on companies with Wide Economic Moats. When I was at ICG we used to talk in terms of "credit" rather than "a moat" but actually we were talking about the same thing. Simply, how well protected is the company against outside influences? Buffett calls it a sustainable commercial advantage and encourages his portfolio companies to invest to widen their moat further.


3. Use Intrinsic Value. This is probably the hardest concept to fully gasp and put into practice. Unlike most analysts I am not at all interested in the relative P/E and try and find some absolute measure based on discounted cashflow which I think is what Buffett bases his valuations on.


4. Always Require a Margin of Safety. In my view the only certainty about any forecast is that in some way it will be wrong. A margin of safety shortens the odds considerably.


5. Think Independently and be Patient. Easily said but a blind contrarian is soon trampled underfoot when the market rushes for the exit. The market is not always wrong (but sometimes can be slow)! Clearly the best performance follows from buying low and selling high but for this to work you have to be sure of the reasons why the market is being irrational. Like Mohnish Pabrai I generally find stocks continue to fall after I have bought and continue to rise after I sell which is one of the joys of not following the herd. Patience: Using a baseball analogy, Buffett also points out that you increase your batting average by only swinging at the best pitches.