Nowadays, many of us who are well-versed in Buffett’s investing philosophy know all about option five. This strategy recommends buying shares of solid public companies at a reasonable valuation, then holding them for the long term. Investing decisions are governed by the fundamentals of the business, not by one’s market outlook. That might sound overly simple until you think about all the media coverage — day-in and day-out — devoted to the ebbs and flows of the overall stock market. As Thelonious Monk once said, “simple ain’t easy.”
My favorite part of the entire memo is Buffett’s comparison of his business-focused investing approach with conventional money management. He notes the biggest difference is one of attitude. With Buffett’s approach, “the business becomes the standard against which the measurements are made rather than quarterly stock prices.” Most importantly, I think, is that Buffett’s approach “demands an excess of value over price paid, not merely a favorable short-term earnings or stock market outlook.” The state of the overall stock market shouldn’t be a primary factor in the purchase decision of an individual stock, according to Buffett. Rather, one needs to think like a potential owner of a business.
One final advantage of option five is that it could be handled by qualified analysts who understood Buffett’s “rather unique selection criteria.” And everything could be handled on a “quite infrequent basis.”
What this means for you
While Warren Buffett was writing privately to Katharine Graham as a friend and board member of Washington Post, his advice is equally valuable and relevant to you.
If you are interested in obtaining above-average returns without taking on additional risk and paying exorbitant fees, then it might make sense to think about purchasing stocks in the same way you might purchase a business. This strategy will require a bit of work on your part, and will demand that you remain focused on the fundamentals even when the market acts irrationally.
But Buffett believes such an approach will deliver a good return, as long as your assessments of the underlying businesses are “reasonably correct.”
This approach apparently worked quite well for The Washington Post Company (NYSE:WPO), which was able to deliver a healthy pension plan to Amazon.com, Inc. (NASDAQ:AMZN)‘s Jeff Bezos, who recently purchased The Washington Post. And this strategy performed extremely well over the years for Warren Buffett, and for shareholders of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), too.
The article Investing Wisdom From Warren Buffett’s Amazing 19-Page Memo originally appeared on Fool.com is written by John Reeves.
John Reeves owns shares of Berkshire Hathaway and Amazon.com. The Motley Fool recommends Amazon.com and Berkshire Hathaway. The Motley Fool owns shares of Amazon.com and Berkshire Hathaway.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
