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Billionaire investor Warren Buffett outperformed the S&P 500 for decades as the CEO of Berkshire Hathaway. His strategy? Stay away from flashy stocks, and assess fundamentals to find undervalued ones.
While his stock picks may seem boring to investors who chase growth, it’s often the more boring investment strategies that generate long-term growth. Here are three investment principles Buffett stuck to, and that you can borrow to grow your wealth.
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1. Look for companies with moats
A moat is a deep trench around a castle that makes it difficult for armies to penetrate, with the drawbridge being the only way in or out of the castle. Buffett took this concept and applied it to his stock analyses by looking for companies with unassailable competitive advantages. A bigger moat further protects the company from competitors and helps it gain market share.
Apple is Berkshire Hathaway’s largest holding, and the tech company has created a moat with innovative products and its appeal as a luxury brand. Its brand reputation helps it stand out from other companies that sell smartphones, computers and software.
2. Find predictable cash flow
Buffett isn’t the type of investor to consider speculative companies with rising revenue growth and high net losses. He wants to invest in companies that are already profitable and generate predictable cash flow. This cash flow funds dividends and stock buybacks, which make stocks more attractive.
Investors who are looking to invest like Buffett should monitor a company’s cash flow over time and see if it is trending upward. Rising cash flow indicates that a company has more capital it can reinvest in growth opportunities. It also gives a corporation the flexibility to raise its dividend at a higher rate than its competitors.
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3. Invest in yourself
One of Buffett’s main rules goes beyond finding the best stocks. While some equities can accelerate your path to long-term financial goals, he argues that it’s important to also invest in yourself.
One way to invest in yourself is to learn how to educate yourself on investing so that you can identify the assets that best align with your financial goals, risk tolerance and time horizons. But another way to invest in yourself is to invest in your career.
Developing skills and building your network can increase your income, which is a critical piece of achieving financial freedom.
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