Have you ever wondered how the greatest investor of all time invests? To invest like Warren Buffett, you don’t need to do anything extraordinary. His investment philosophy can be summed up as investing long-term in excellent businesses that are selling below their fundamental value.

In this Hapi article, you will learn about the story of the Oracle of Omaha and his investment strategy to achieve extraordinary returns for decades.

A Brief Look at Warren Buffett's History

Warren Buffett was born in 1930 in Omaha, Nebraska, USA. He is an American businessman and philanthropist and is considered the most successful investor of the 20th century and into the 21st century. His impressive returns have consistently placed him among the ten richest people in the world, thanks to a personal fortune of over $95 billion. His wealth is worth more than Twitter, Uber, and Snapchat combined!

Buffett developed an interest in the business world and investments at a young age. Thanks to the power of compound interest, he grew his wealth in the US stock market from a young age. After graduating from the University of Nebraska, he moved to New York City to pursue his master's degree at Columbia University's Business School, where he met his mentor, Benjamin Graham, who had a crucial influence on Buffett's investment philosophy.

He later returned to his hometown to take control of Berkshire Hathaway Inc, which at the time was a textile manufacturer. He transformed it into his main investment vehicle, achieving returns of around 28% annually between the 1960s and 1990s, far exceeding the average index returns of 11%.

What Steps Does He Follow to Analyze a Stock?

Buffett is a follower of the Value Investing school, proposed by his mentor, Benjamin Graham. Value investors look for stocks priced well below their intrinsic value. In other words, a value investor tries to find undervalued stocks compared to other buyers in the market.

This approach assumes that markets are not always efficient, meaning that stock prices don't always reflect their true value, either because they are inflated or undervalued. It is expected that the market will eventually favor those quality stocks that were undervalued for some time. Daily price movements are irrelevant; what matters is the company's actual performance. Patience is key!

To dive deeper into this investment strategy, here are four important considerations for investing in Hapi like Warren Buffett:

1. Calculating the intrinsic value of a stock
2. Operating with a margin of safety
3. Focusing on the quality of the business
4. Never following the crowd

1. Calculating the Intrinsic Value of a Stock

To determine this value, you must analyze the fundamental aspect of the company. The intuition behind stock investment is simple. You make an upfront payment to obtain a portion of the company, hoping that its value increases. The stock's value is directly proportional to the discounted cash flow expected to be generated by the business during its remaining life. You aim to discount future cash flows to calculate its present value for the investor.

2. Operating with a Margin of Safety

The margin of safety is a principle to maximize the return on investment and reduce the chances of losing money. It involves buying a stock only when it is sold at a significant discount to its fundamental value.

For example, if the intrinsic value of an asset is $100, you should wait for its price to fall well below that $100 to make a buying decision on Hapi, your favorite investment app. The margin of safety can vary depending on the risk profile of each investor, but it is generally above 20%. In the previous example, with a 20% margin of safety, you should buy the stock when its price drops to $80.

3. Focusing on the Quality of the Business

One of the most important factors when choosing stocks is looking at the quality of the business. To find the highest-quality businesses, it's essential to consider the following aspects:

• ROE: Return on Equity (ROE) represents the shareholders' return on investment. Buffett ensures that the company's ROE has performed excellently over many years compared to other companies in the same sector.
• D/E: The debt-to-equity ratio (D/E) is another factor he considers. Buffett prefers a lower debt ratio so that earnings growth is driven by investor capital rather than debt from creditors. A high D/E ratio can lead to greater earnings volatility due to high interest expenses.
• Net profit margin: The net profit margin is calculated by dividing net income by sales. A good company should not only have a good margin but also seek to increase it over time. A high profit margin indicates that the business is functioning correctly. Likewise, an increase in margins signals efficient and successful management of the company, controlling expenses. To learn more about this, visit our article on margins and indicators.
• Competitive advantages: There are two main types of competitive advantages. The first refers to a company having lower costs due to economies of scale. This allows them to offer lower prices that are more attractive to the public without risking their margins. The second occurs when a company owns a powerful franchise or a very attractive product brand that customers are always willing to pay a premium for over the competition.

4. Never Follow the Crowd

Warren Buffett once said: "Be fearful when others are greedy and greedy when others are fearful." When emotion and greed overwhelm the market, prices often soar above fundamental value. That's why it's important to avoid following the masses.

If everyone is investing in a specific asset, that could be a sign it's overvalued. It's better to avoid buying to avoid overpaying for an asset that may later have low returns. Conversely, when others are fearful and stop investing, it can present a good investment opportunity, as lower prices offer a margin of safety for buying stocks.

So, When Should You Sell?

For Buffett, an intelligent investor should only sell when the scenario or investment thesis changes for two main reasons:

• The first is that the investor needs liquidity for a more attractive investment opportunity.
• The second, and most important reason, is when the fundamentals of your stocks change due to factors like competition or changes in market trends.

Get Ready to Invest Like Warren Buffett!

When Jeff Bezos met Warren Buffett, he asked: "Warren, if your investment strategy is so simple, why doesn’t everyone copy you?" To this, Warren responded: "Because no one wants to get rich slowly." That anecdote shows that investing like Warren Buffett is much simpler than commonly believed. It all comes down to investing long-term in high-quality businesses selling below their intrinsic value.

Are you ready to invest like the greatest investor of all time? Use the concepts and examples in this article as a gateway to develop your own investment philosophy through practice. Just as Buffett amassed his fortune through investments in the US stock market, you can also achieve it by opening your Hapi account! In just five minutes, with these steps, you can open your account now.