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Investment Strategies of Warren Buffett
and Implications for Investors

(Extract From My Wealth Magazine, September 2001)

By John Price, PhD


There is no question that Warren Buffett is the world's greatest investor. He started with around US$100,000 when he was 25. He is now 70 and his net worth is approximately US$35 billion. This represents an annual return that is close to 30 percent.

Putting it another way. If you invested $10,000 in Buffett Partnership Ltd in 1956 and reinvested in the stock of Berkshire Hathaway in 1969 when Buffett terminated the partnership, you would be worth well over $200 million-after all taxes, fees and expenses.

Over the past years I have tried to read everything written by Buffett. My aim has been to understand his investing methods in a very practical way firstly so that I can implement them in my own portfolios and secondly so that I can teach them to others. Last year I gave over 25 workshops in Australia and the USA to beginners and experienced investors showing them practical steps how they can invest like Warren Buffett. Also my investment software sold in 15 countries around the world.

Before discussing Buffett's methods, it will be helpful to say a few words about the man himself. He is 70 years old and lives in Omaha, Nebraska, the city where he was born. In his 20's he worked for a number of years on Wall Street but returned to Omaha because he said that in New York there was too many stimuli. Talking about Omaha, he once said, "It's easier to think here."

Buffett does not use any analysts or advisors when making his stock selections. In fact, Berkshire Hathaway, the 80 billion dollar investment company managed by Buffett, only has 12 employees, mainly office staff.

The first point in understanding Buffett's investment methods is to recognize that he does not think about the stock market. "We look at individual businesses," he said recently. "And we don't think of stocks as little items that wiggle around in the paper. We think of them as parts of businesses."

If I had to select a single quote that described Buffett's methods it would be the following:

Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now.

Over time, you will find only a few companies that meet these standards-so when you see one that qualifies, you should buy a meaningful amount of the stock.

Each word or phrase in this quotation points to key components of his ideas. For example, "rational" tells us that investing should not be based on hope or speculation, "easily understandable business" guides us to those areas in which we have the most familiarity, and "five, ten and twenty years from now" makes his investing time frame clear.

If you want to see how your investing methods compare with those of Warren Buffett, using the previous quotation as a yardstick would be a good place to start.

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