How Warren Buffett Finds the Best Stocks to Invest In

How Warren Buffett Finds the Best Stocks to Invest In

There’s a lot you can learn from Warren Buffett, and much of it can help you grow wealthier.

If I told you there’s an investor who has averaged annual returns of 20% over more than 50 years, would you be impressed? (In case you’re not sufficiently impressed, know that a 20% growth rate will turn a single $100 investment into about $900,000 over 50 years.) Might you want to learn more about how this person invests in order to perhaps improve your own investing?

If so, you’re in luck, because the investor is Warren Buffett, who has run his company, Berkshire Hathaway ( BRK.A 1.18% ) ( BRK.B 1.07% ), for more than 50 years — and who has long been happy to share his insights and advice about investing through gobs of interviews, articles, and letters to shareholders that he makes freely available at his company website.

Here’s a look at five things Buffett does that have helped him reap such massive rewards in the investing arena. Image source: Getty Images. 1. He reads widely

For starters, the guy reads — a lot . He reportedly spends around 80% of his workday reading and thinking

Buffett also advises others to read a lot. He has suggested: “Read 500 pages every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.” Back in 2007, CNBC’s Becky Quick said that he reads quickly, noting that he reads some six newspapers each day.

Buffett will, of course, read the annual reports of companies in which he has invested, but he goes beyond that. As he explained when answering shareholder questions at his 1996 annual meeting: “If we owned stock in a company, in an industry, and there are eight other companies that are in the same industry … I want to be on the mailing list for the reports for the other eight because I can’t understand how my company is doing unless I understand what the other eight are doing.”

So aim to read a lot. Even if you don’t read 500 pages a day, try to read more than you’re currently reading. Learn a lot about great investors, great managers, great businesses, investing strategies, industries of interest, and developments in those industries. 2. He respects his circle of competence

Next, Buffett stays within his “circle of competence” — a phrase he has used often, especially when he has been asked why he never invested in this or that popular growth stock. In his 1996 letter to shareholders, he explained: What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. And in his 1992 letter, he said: …we try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change, we’re not smart enough to predict future cash flows. So take some time to figure out what you really understand well and what you don’t. You can expand your circle of competence through reading and other forms of learning, but aim to not invest beyond its bounds. 3. He looks for good values

Buffett has also done well because he respects valuation. He’s a value investor , meaning that he wants to invest in companies when their price is below their intrinsic value . Doing so affords him a ” margin of safety .”

As he explained in his 1992 letter to shareholders: …we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success. It’s worth noting that his views have shifted a bit over time. Thanks in large part to the influence of his investing partner Charlie Munger, he has come to believe that: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Still, he never wants to overpay for a stock or company. 4. He thinks of stocks as businesses


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