In times of economic decline, many investors ask themselves, "What strategies does the Oracle of Omaha employ to keep Berkshire Hathaway on target?" The answer is that the esteemed Warren Buffett, the most successful known investor of all time, rarely changes his long-term value investment strategy and regards down markets as an opportunity to buy good companies at reasonable prices. In this article, we will cover the Buffett investment philosophy and stock-selection criteria with specific emphasis on their application in a down market and a slowing economy.
The Buffett Investment Philosophy
Buffett has a set of definitive assumptions about what constitutes a "good investment". These focus on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. (For further reading, seeWarren Buffett: The Road To Riches and What Is Warren Buffett's Investing Style?)Buffett looks for businesses with "a durable competitive advantage." What he means by this is that the company has a market position, market share, branding or other long-lasting edge over its competitors that either prevents easy access by competitors or controls a scarce raw-material source. (For more insight, see Competitive Advantage Counts, 3 Secrets Of Successful Companiesand Economic Moats Keep Competitors At Bay.)
Buffett employs a selective contrarian investment strategy: using his investment criteria to identify and select good companies, he can then make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.
In addition, he assumes the following points to be true:
- The global economy is complex and unpredictable.
- The economy and the stock market do not move in sync.
- The market discount mechanism moves instantly to incorporate news into the share price.
- The returns of long-term equities cannot be matched anywhere else.
Buffett Investment Activity
Berkshire Hathaway investment industries over the years have included:- Insurance
- Soft drinks
- Private jet aircraft
- Chocolates
- Shoes
- Jewelry
- Publishing
- Furniture
- Steel
- Energy
- Home building
The industries listed above vary widely, so what are the common criteria used to separate the good investments from the bad?
