Skip links

How to invest like Warren Buffett. The latest on value investing strategies by Warren Buffett & Charlie Munger.

How to invest like Warren Buffett. The latest on value investing strategies by Warren Buffett & Charlie Munger.

Trading for beginner - Warren-Buffett-Large
Charlie Munger is Warren Buffett’s business partner in the world’s largest company, Berkshire Hathaway. Buffet, also known as The Oracle of Omaha and Munger are considered significant forces in value investing, and many investing enthusiasts follow them because of their calculated risk assessment and impeccable returns in the stock market. But how exactly do you invest like Warren Buffet and Charlie Munger?

An introduction to value investing

Value investing is the art of purchasing stocks at considerable discounts compared to the actual worth or so-called intrinsic value of a stock. Complex financial formulas calculate intrinsic value, but they generally take an objective view of a company’s goals, profits and predicted numbers in the future. The key in value investing is finding companies where the stock price does not correlate to the company’s intrinsic value. In other words, you pay the price to own part of a business, and if the numbers do not justify the stock price, it can either be considered a high valuation or a value play. Many things can cause a stock price to fall drastically. Value investors often stay patient until securities hit the price they’re aiming for, assuming estimates and expected earnings have not changed significantly. Short-term profit disappointment within wages season usually causes stock prices to fall drastically. When stock prices fall drastically, value investors are often happy, even when investing in that company. This principle might seem counter-intuitive, but they believe in valuation, and now that lower price is not justified in the long run. Therefore, further falls in the stock price allow them to dollar-cost-average (DCA) the security, making the average initial investment lower, while ultimately boosting returns.

Why cash-flow is king

As many value investors note, the stock price is the price you pay for all future cash flow. The discounted cash flow (DCF) method is therefore used widely by value investors to forecast future cash flow. As a result, investors can pick undervalued stocks by assessing the current market price with respect to future cash flow.

Why is value investing difficult?

Many values investing legends will advise you to buy the S&P 500 ETF, not look at your investment, and wake up 40 years later with an excellent fund for retirement, as the S&P500 historically averages 10 percent per annum. Still, a slightly higher return than 10% can significantly increase your net returns when investing with large amounts. But why is it so challenging to perform value investing? Value investors use complex financial calculations to assess whether a company’s intrinsic value matches stock prices, which can be difficult and takes an in-depth understanding of how economies work, specific sectors, company financials and macro-economic influences. Moreover, value investors often move against the herd, and emotions can in the way. When the market is most frightened, value investors tend to smile, as they have been waiting years for a company’s stock price to fall. Value investors know that the stock price is not directly related to company performance, and if the fundamentals remain intact, low valuations can make a company a buy.
This website uses cookies to improve your web experience.