One of the most iconic investors of all time, Berkshire Hathaway’s (NYSE:BRK.B)(NYSE:BRK.A) Warren Buffett is an investor every Fool should follow. The Oracle of Omaha’s time-tested investing strategy has produced one of the greatest amalgamations of wealth in history.
For Warren Buffett followers — and those who may not have heard his name — investing for the long term in high quality companies is a simple, yet elegant, strategy.
In this article, I’m going to discuss two of Mr. Buffett’s modus operandi. I believe every investor ought to follow these tips, particularly in this volatile market.
Focus on quality, not quantity
One of my favourite “Buffetisms” is “Is it better to buy a great company at a decent price than a decent company at a great price.” Warren Buffett’s progression from a deep value investor to a quality focused investor took years.
He previously focused on a Graham-Dodd “cigarette butt” investing philosophy. This strategy is driven by simple ratios such as price to book value. The idea was that an investor could pick up a stock (or cigarette butt) for nothing (less than book value). Then, the investor could get a couple of puffs before either liquidation or a recovery took said company’s share price higher.
This successful value investment strategy was supplemented later on in Mr. Buffett’s career. At this point, he focused on companies with durable competitive advantage. He called these “moats.” Such companies put up large enough barriers to entry.
Alternatively, these companies have unique company specific traits, rendering them nearly immune to competition. This advantage would then allow for greater margins, profitability, and growth over long periods, given a long-term investor compounding advantage.
In this market, finding high-quality companies with moats is not necessarily the difficult part. Finding said companies at a decent price is. Quality in the context of value is of importance here.
The 10 Best Stocks to Buy This MonthClick here to learn more!
Avoid airlines (really) this time
One odd Warren Buffett move in recent years was his large investments in a number of the largest U.S. airlines. Mr. Buffett had previously stated that he would never buy airlines again, following a bad experience decades ago. It turns out, that some lessons need to be learned twice, as this “avoid airlines at any price” suggestion has been reiterated by the Berkshire head.
For Canadian investors considering an airline like Air Canada at what may look like deep value levels, I would encourage pause before jumping in with both feet. Airlines are among the most cyclical stocks to own and are highly prone to serious downturns.
I expect we will see a very negative medium-term landscape for Air Canada and its peers, furthering liquidity and solvency concerns, which I think will increase from here.
As far as Air Canada and its U.S. counterparts are concerned, I will be taking Warren Buffett’s advice on this sector and steering clear. I would encourage other Foolish investors to do the same.
Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares).