Readers get a glimpse of how Berkshire Hathaway’s Warren Buffett generates wealth in John Train’s book “Midas Touch.” The following are the top ten investment principles used by Buffett himself.
1. Buy a share as though you were buying the whole company. Determine how an enterprise is worth but do not rely on formal financial projections or mathematical formulae. Invest in “a business you understand, favorable long-term economics, able and trustworthy management, and a sensible price tag.”
2. Volatility does not create risk. A serious investor sees opportunity in volatility.
3. Value should include “growth at a reasonable price” or GARP. The ideal companies have a business “moat” that has steady and reasonably predictable growth. In the long run, these businesses are more tax-efficient and more convenient than one bought at a bargain.
4. Invest on what you know best. Refrain from seeking the “newest” thing because it is too risky. Buffett's biggest investments are firms founded in the 1800s, such as American Express, Wells Fargo, Procter & Gamble, and Coca-Cola. Said Buffett: “Startups are not our game.”
5. Avoid investing in bad industries, or turnarounds. It is not sound to invest in a business that requires a revival.
6. Seek out businesses that can reinvest at high rates of return over long periods. Avoid investing in low-margin businesses that require cash from you periodically and can expect only modest rates of return.
7. Do not sell a great stock just because it has doubled. Its value could go up when you least expect it, sometimes going up 20 or even 100 times during the next generation.
8. Never offer your own underpriced stock for the fully valued stock of an acquisition candidate. You will end up on the losing end of the bargain.
9. Avoid long-term bonds. Given how easy it is to inflate currencies, this is not a wise move.
10. Invest like a fanatic. Concentrate relentlessly on how you can transfer wealth to your own pocket.
