The Warren Buffett investment strategy can be described in terms of risk, demand for a margin of safety, patience, and investing with a strong conviction:
Warren Buffett Quotes on Risk
Warren Buffett defines risk as ‘paying more than what a business would prove to be worth’. The way to mitigate this risk is to find companies whose selling stock prices afford them a significant margin of safety. The phrase ‘Margin of Safety’ (on which Seth Klarman wrote a famous book) best describes Warren Buffett’s investment approach. The margin of safety needs to be large enough such that there can be a good margin allowing for error.
Warren Buffett Quotes on Patience
Warren Buffett likes to cite a core concept he learned from his mentor Benjamin Graham – markets may be seen as voting machines in the short run where popular opinion wins; in the long run, however, markets are weighing machines that reflect the intrinsic value of the business. Thus, although the market may be blind to the success of a business in the short run, it will eventually validate it.
Like other fund managers who have a long investment horizon, Buffett realizes that what is important is not the speed at which the market recognizes the success of a business. Rather, it may be an advantage to have the market take a long time to recognize the business’s success – as the investor then has more opportunities to buy the undervalued business. What is crucial, however, is whether the intrinsic value of the business is increasing at a pace that is satisfactory. This is because that is what will determine the success of the investment over the long run.
Warren Buffett Quotes on Diversification
Warren Buffett believes that it is most important to invest with a strong conviction. Diversification is a foolish idea if it means buying with low conviction. This is an important part of the Warren Buffett investment strategy. For example, when the price of Coca-Cola fell to levels that he found very attractive in 1998, Buffett invested a quarter of Berkshire’s market value into Coca-Cola.