Exposed the Strategy of Warren Buffett

Exposed the Strategy of Warren Buffett

        Understanding Warren Buffett's investment genius is not that difficult. However, it is often counterintuitive to the investment theories and strategies that 99 % of most investors follow. What is counterintuitive about Buffett's methods? When others are rushing to sell off stocks, Warren will be selectively buying in. The key word here is "selectively" When Warren is buying in, he is picking the cream of the crop - companies that have a durable competitive advantage.

And when the whole world is counting its riches after buying into a bull market, we find Warren selling out into the rising market, gathering a large cash position. In the two of a bull market, we are that make the up top likely to find Warren sitting idly about - doing nothing appearing to be missing all the easy money offered up by the seemingly endless rise in stock prices.

In fact, at the high end of the last two bull markets, investment pundits of the day pointed their fingers at Warren proclaiming he had lost his touch or was over the hill. Yet when these markets finally crashed, and the masses were bailing out of stocks, who did we find at the bottom of the investment barrel picking up some of the greatest companies in the world at bargain prices? Warren Buffett.

Buffett's early strategy was to cash out of the market when it started to reach a buying frenzy, as in the late sixties. In later years warren simply stopped buying when prices got too high and let the cash build up in Berkshire Hathaway, waiting to take advantage of the inevitable crash in stock prices. It is his superior understanding of the microeconomic forces that drive individual businesses that allows him to pick future winners from the heap of rubble. He buys into companies that have superior long-term economics in their favor. These exceptional businesses make for superior long-term, twenty-to - forty-year investments.

When the stock market crashes, Warren buys into companies that have good economics working in their favor - companies he sells as the market and their stock prices recover. This gives him cash for future investments. He also invests in individual "events" that might - over the short term - drive down a company's share price below what its long-term economics makes it worth. And he is a big player in the field of arbitrage, which also generates large amounts of cash.

Buffett's key to success begins with having cash when others don't. Then he waits. Once the stock market is crashing and offering up excellent businesses at bargain prices, he is in there buying. Next, he holds on to the great businesses as the market moves up, selling off the average businesses and letting the cash start to pile up. Finally, as the market starts to move onto high ground, he lets the excess income from dividends and stock sales pile up in his cash account keeping only the companies with a durable competitive advantage that will help make him superrich over the long term. (Warren lets the cash income from all of Berkshire's businesses build up. Individual investors would let earned excess income accumulate in their money market account. )

Warren has repeated this cycle over and over and over again to the point that he has an enormous portfolio of some of the finest businesses that have ever existed, and in the process, he has become the richest person in the world in 2008.