Undoubtedly one of the most-respected investors ever, Warren Buffett’s recipe for success is simple. It boils down to:
- Buy businesses, not stocks. In other words, think like a business owner, not someone who owns a piece of paper (or these days, a digital trade confirmation).
- Look for companies with sustainable competitive advantages, or moats. Firms that can successfully fend off competitors have a better chance of increasing intrinsic value over time.
- Focus on long-term intrinsic value, not short-term earnings. What matters is how much cash a company can generate for its owners in the future. Therefore, value companies using a discounted cash flow analysis.
- Demand a margin of safety. Future cash flows are, by their nature, uncertain. To compensate for that uncertainty, always buy companies for less than their intrinsic values.
- Be patient. Investing isn’t about instant gratification; it’s about long-term success.
Of course, what’s simple in theory can be less so in execution.
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