HOW CAN YOU APPLY BUFFETT’S 4 PRINCIPLES TO YOUR OWN INVESTING?

Updated: Aug 2, 2021

Stay within your circle of competence: What industries and companies do you understand? For example, Apple, Walmart, and John Deere have easy business models to understand and operate in relatively straightforward industries.

Think you want to invest in that hot tech start-up that facilitates the creation of backward overflow synergies? Unless you have specialized industry expertise and know what that means, or you take the time to carefully study the company and industry first, you better stay away.

Look for companies with favorable long-term prospects: What is your company’s long-term competitive advantage? Does your company have a very wide and very sustainable “moat” that will protect its “castle” for years to come? Or will the company constantly have to re-dig its moat every year?

Evaluate top management for honesty and competence: Has the company or any of its executives been involved in fraud at any point in time? Is there “key man” (or key woman) risk? What would happen if the CEO or founder of the company left?

Is the stock of the company at least reasonably priced: What is the price of the company on the stock market and what do you think the intrinsic value of the company actually is? Is there a margin of safety, i.e. is the stock trading at a discount?

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