Warren Buffett, one of the most successful investors on the planet, has built a trillion-dollar company and crafted a legendary investing style that has delivered nearly double the returns over a lifetime. Berkshire Hathaway, originally an ailing textile company, was transformed into an insurance giant under Buffett’s leadership, uniquely structuring itself as a tax-efficient investment behemoth. From 1965 to 2023, the company had returned 19.8 percent compounded annual return versus 10.2 percent for the S&P 500 index (including dividends). In terms of overall gains, it amounted to 4,38,748 percent for Berkshire versus 31,222 percent for the benchmark index. At age 94, with an investment track record of 68 years—longer than the lifespans of many legendary fund managers—Buffett's investing principles remain as relevant as ever. Here are some of his core principles:
Never lose money
"The first rule of investing is don’t lose money. The second rule is don’t forget the first rule. And that’s all there is to it." This quote by Warren Buffett sums up the core of his investment philosophy. Buffett's strategy is marked by his strong aversion to losses. This manifests in several ways, including the idea of not using too much leverage that can wipe you out if the market turns adverse.
In stock selection, the trick is to ensure that you know as much as possible about the company, to the degree of eliminating risk. The second part is to buy it at a price lower than its intrinsic value. Once all sides are covered, the idea is to not get perturbed by Mr. Market, a metaphor coined by his guru Benjamin Graham to describe the stock market's often irrational behavior. Mr. Market represents the market as a moody business partner who offers to buy or sell shares at varying prices, reflecting the emotional extremes of optimism and pessimism. As an investor, it is on you to hold your ground and take what is truly sensible and ignore what is idiotic.
Power of compounding
Albert Einstein called compounding the eighth wonder of the world, and Buffett demonstrated its power in the world of stock markets. “My wealth has come from a combination of living in America, some lucky genes, and compound interest," Buffett has famously said.
This principle leads to the idea that buying businesses that can deliver higher growth sustainably over long periods make for the best investments, as opposed to getting in and out of stocks that perform over short periods, which only end up enriching brokers and adding to tax liabilities. Buffett bought into several companies that turned out to be compounding machines for very long periods. In 1988, Warren Buffett famously said, "Our favorite holding period is forever."
The three goods in investing
The power of compounding will work only if you choose to invest in a good company with good management and at an attractive price. Buffett has held that "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." What this means is that a wonderful company will compound money better—after all, a wonderful price is only a one-time pop, which certainly could be a great cushion, but compounding works magically over longer periods.
As for the quality of management, Buffett’s quote that "When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact," and that "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will," underscores the importance of a good business, although Buffett has always maintained a high threshold for management integrity and capital allocation policy, which directly impact shareholder returns.
Concept of economic moat
Buffett is known for taking the concept of economic moats and making it the "holy grail" of investing. This principle involves investing in companies with a sustainable competitive advantage, ensuring their long-term success and resilience against competitors. In his own words, Buffett believes that “a truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.” The advantage of a moat lies in its ability to shield a business from competitors. Buffett explains that in a capitalist environment, high-return businesses will continually face competitive pressure. Thus, having a strong moat—whether through being a low-cost producer or possessing a powerful global brand—is crucial for sustained success.
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Margin of safety
Buffett has often referred to the margin of safety as the key factor in the success of stock investing. This investing rule that the investment mogul swears by, inspired by his mentor Ben Graham, involves purchasing stocks at a price well below their estimated fair value. The estimation of intrinsic value of a business itself is a function of one’s deep understanding of the business and the moats the company enjoys. Yet, this built-in cushion helps account for potential errors and market fluctuations. Buffett’s philosophy has been to sit out patiently for the “right opportunity.”
Circle of competence
Another simple rule Buffett swears by is to operate within one’s Circle of Competence. In his 1996 Shareholder Letter, Warren Buffett noted, “An investor’s key skill is the ability to accurately assess certain businesses. It’s crucial to focus on ‘selected’ businesses rather than attempting to master every company. You don’t need to be an expert on many companies—just those within your circle of competence. The size of this circle is less important than understanding its boundaries. Within this circle lie the skills you’ve developed over your career or life, while beyond it are areas you understand only partially or not at all.”
While Buffett has consistently emphasised the Circle of Competence, he has continuously expanded it, investing in a variety of businesses including technology and all kinds of securities and complex structures. One of the rarest qualities of Buffett and his partner Munger has been to model themselves as learning machines, continuously expanding the circle of competence.
Look at stocks like pieces of business
Warren Buffett famously said, "I am a better investor because I am a businessman, and a better businessman because I am an investor." This reflects his philosophy that stocks should be viewed as pieces of businesses rather than just trading symbols, emphasizing the importance of understanding and valuing the underlying business behind a stock. Internalizing this idea feeds into the concept of buying strong businesses and sticking to them for a long period, allowing the power of compounding to work.
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