Warren Buffett’s Priceless Investment Advice

Jul.20, 2007 in Market Outlook

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett’s approach is both easy to follow and demonstrably successful over a period of more than 50 years. Why try anything else?

The devil is in the details
So, buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies and determining what constitutes a reasonable price. Buffett recommends that investors look for companies that deliver outstanding return on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands alongside consistent or improving profit margins and returns on capital.

How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values — as calculated by taking the present value of all future cash flows. Ultimately, he believes that “value will in time always be reflected in market price.” When the market finally recognizes the true value of your undervalued shares, you begin to earn solid returns.

Do-it-yourself outperformance
Beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values before they’ll be able to capture Buffett-like returns.

If investing in wonderful companies at fair prices is good enough for Warren Buffett — arguably the finest investor on the planet — it should be good enough for the rest of us.

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