- Warren Buffett is one of the most successful investors ever, using an approach known as value investing.
- Value investing is essentially the opposite of speculative investments, such as bitcoin.
- There are three essential characteristics needed to succeed as a value investor: patience, discipline, and risk aversion.
Warren Buffett loves a good deal.
In fact, his propensity for value spills over into many areas of his life, from his phone to his investment portfolio. And it’s done more than just save him a few dollars here and there – it’s helped him amass billions.
The famously frugal billionaire – who insists on using a flip phone and still lives in a modest home in Omaha, Nebraska – built his wealth slowly, by finding good investment deals. It’s an approach known as value investing.
It requires investors to look past the news, and instead focus on the fundamentals of a company when deciding where to put their money. If a stock is trading for less than its intrinsic worth, a value investor would buy it and hold onto it until the price caught up, regardless of fluctuations along the way.
Sounds easy. But it seems this approach may demand a certain temperament to be successful.
“While it might seem that anyone can be a value investor, the essential characteristics of this type of investor – patience, discipline, and risk aversion – may well be genetically determined,” writes billionaire hedge fund investor Seth Klarman in the preface of the sixth edition of “Security Analysis,” one of the books Buffett credits with giving him the foundation he needed to become the legendary investor he is now.
Those three characteristics – patience, discipline, and risk aversion – come up often when Warren Buffett speaks about what has made him successful:
- Patience: “Value investors are not concerned with getting rich tomorrow,”Buffett explained to a group of MBA students. “People who want to get rich quickly, will not get rich at all. There is nothing wrong with getting rich slowly. Remember we both sleep on the same mattress and eat the same food.”
- Discipline:“Stocks go up and down, there is no game where the odds are in your favour. But to win at this game, and most people can’t, you need discipline to form your own opinions and the right temperament, which is more important than IQ,” Buffett has said.
- Risk aversion:In his 2018 letter to shareholders, Buffett wrote that “investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. ‘Risk’ is the possibility that this objective won’t be attained.” But for Buffett, avoiding risk doesn’t mean gravitating to seemingly safer investments, like bonds. For a long-term investor, his advice is the opposite – have a diversified portfolio of equities.
“When you first learn of the value approach, it either resonates with you or it doesn’t. Either you are able to remain disciplined and patient, or you aren’t,” according to Klarman.
Still, there’s one thing any aspiring Buffett investor can do to cultivate the characteristics that are key to value investing success: Read – a lot.
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