Buffett’s mentors

Warren Buffett studied stock market analysis at Columbia University, New York, under the wing of Benjamin Graham, who was, until the arrival of Buffett, perhaps the greatest thinker on portfolio investment.

Graham was a classic value investor. In other words, he was looking to buy companies with a net asset value per share greater than the share price. Buffett inherited Graham’s fascination for technical analysis and aversion to paying over the odds for any stock.

The influence of Omaha, Nebraska

Buffett has spent virtually all his working life in Omaha, Midwest America, a town dedicated to economic activity with few distractions. This has given him a real feel for business and how businesses work. He sees them as living organisms and thinks of a shareholding not as an abstract piece of paper but as a genuine stake in a business.

He has been involved in the management of various companies for more than 40 years and in 1965 took over Berkshire Hathaway, a textile manufacturer in Massachusetts, which he turned into his own investment company. Its performance proved a moneyspinner for shareholders and turned Buffett into the world’s richest man. In 1965 Berkshire Hathaway’s share price stood at less than $20. Today it stands at more than $80,000. Buffett's letters to Berkshire Hathaway shareholders have become collector's items.

Understanding businesses

Buffett famously said that you should never invest in a business that you do not understand. This stance meant that he did not invest in dot-com stocks. As a result, his investment performance suffered at the height of the technology bubble, but he had the last laugh when the bubble burst and his more sedate investments stood up a lot better in the market crash than the technology-rich portfolios of many of his competitors.

The type of businesses Buffett likes

In addition to being readily understandable, they should have favourable long-term prospects, strong barriers to entry (ie, a difficult business for competitors to get into) able and trustworthy management and a sensible price tag. Among the stocks that currently get the nod from the Sage of Omaha are American Express, Coca-Cola, The Washington Post and Tesco.

Playing the long game

Investment, according to Buffett, is about the long haul, not the quick buck. He thinks that there are very few outstanding businesses that are worth investing in - and he is ready to take plenty of time in digging them out. Once he has acquired a stake in one of them, he is reluctant to sell, preferring to allow them to accumulate wealth over the long term. As he once put it: you should never buy a stock unless you would be happy if the stock exchange closed down for the next ten years.

Don’t be swayed by the crowd

Buffett has always had a healthy disdain for the herd mentality. He believes that it is vital for investors to think independently and not follow the fashion of the moment. He endorses the maxim of Benjamin Graham, his mentor: “That other people agree or disagree with you makes you neither right nor wrong. You will be right if your facts and reasoning are correct.”

The ability of Buffett to swim against the tide was amply demonstrated in the 1973-74 stock market collapse , when he was able to buy substantial stakes in a number of stocks that other investors were seeking to dispose of at rock-bottom prices. He showed the same independence of thought when resisting the temptation to buy into the dot-com boom.

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