In the days leading up to Facebook’s historic (and now infamous) IPO, CEO Mark Zuckerburg pursued Warren Buffet’s sage advice. The young CEO, who’s gone from creating Facebook in his Harvard dorm-room to billionaire in only 8 years, spoke “for hours” with Buffett about how to take the social network public.
And it’s no surprise. As one of the wealthiest people in the world, Buffett is also known for his incredible business acumen and strong philosophies around business, economics, and investing.
What makes him different however, is that most of these philosophies go “against the grain” and collective wisdom of the financial markets.
Here are three of his investing lessons that will help you learn from the master.
1. Invest in Productive, Cash-Generating Businesses
Contrary to most financial managers, Buffett doesn’t recommend investing in currency-backed assets or gold. Especially as a way to hedge inflation.
Instead, he favors productive assets like businesses, farms and real estate. His rationale is that these supposed “safe” investments are actually the riskiest.
The main reason is that these assets actually lose purchasing power over time, while sound productive assets should grow – despite market cycles.
And Buffett has said that the goal for his companies isn’t to simply “make money”.
The goal is to generate more money then you will have to pay in taxes and inflation, so that you can buy more things later than you can with the same money right now.
2. Invest in Businesses, Not Markets
Warren Buffett isn’t one of the richest people in the world because he buys stocks. He’s so successful because he invests in businesses.
His investing philosophy is that you should favor good, sound businesses over markets or trends.
So what makes an attractive business? Here are some of the fundamentals he looks for:
- Utilities:Is the company used or consumed on a daily basis?
- Moats:Does the company have a defensible, competitive advantage?
- High Barriers to Entry: Is the industry difficult to enter and hard to displace the position of the company? Or will a new technology disrupt the entire market?
- Cash Generating:Does the company have low (or virtually no) accounts receivable and inventories?
- Pricing Power: Can the business raise prices without losing significant customers to it’s competition?
- Lack of Superstars: If the business has to rely on superstars, then all the value is tied to them.
When you can accurately assess these elements, you get closer to a stock’s “intrinsic value”. This is the real, underlying value – isolated from Mr. Market’s volatility – that Buffett learned from mentor Graham.
3. Look for Undervalued Investments
Finally, one of Buffet’s greatest lessons is to avoid investing in the hottest trends or companies, and paying inflated prices.
He once told FOX Business Network anchor Liz Claman:
“Liz, you never want to buy the quarterback who just won the Superbowl. He’s too expensive. You want to buy the guy in the hospital bed with his leg in a sling because you know he’s cheaper and the odds are, he’ll get better and blossom.”
A lot of this comes down to going against the current commotion in the public financial market, if it makes sense. (And it’s probably one of the reasons he passed over the social media giant Facebook’s IPO.)
He has another oft-quoted phrase that says, “Be fearful when others are greedy, and greedy when others are fearful”.
Buffett has no problem making these tough decisions because he’s concerned with a business’ intrinsic value, not the stock price. And he proves that if you want uncommon results, then you need to stop following common advice.
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