What Warren Buffett Actually Does

Value investing in plain English — moats, margin of safety, and patience

7 min read Intermediate

"Warren Buffett has compounded wealth at roughly 20% annually for 60 years. His strategy is simple to describe and genuinely hard to execute. This chapter explains the actual approach — not the myths."

For educational purposes only. Nothing in this chapter is financial advice. All figures are illustrative examples. Tax rules, account types, contribution limits, and regulations differ by country and change over time. Always verify current rules with official government sources or a qualified financial adviser before making any investment decisions.

Value Investing — The Core Idea

Warren Buffett's investment approach is rooted in value investing, a philosophy developed by his mentor Benjamin Graham. The central idea: every business has an intrinsic value — what it is actually worth based on its earnings, assets, and growth prospects. Markets are sometimes rational but often not. When Mr Market (Graham's metaphor for the unpredictable emotional market) prices a business below its intrinsic value, that is an opportunity to buy.

Buffett's refinement of Graham's approach (influenced by Charlie Munger) moved from buying mediocre businesses cheaply to buying wonderful businesses at fair prices. The distinction matters: a cheap, mediocre business may never reach its potential; a great business at a fair price compounds in your favour over decades.

Economic Moats and Margin of Safety

Buffett looks for companies with economic moats — durable competitive advantages that protect profits from competitors over long periods. Types of moat: brand strength (Coca-Cola), network effects (American Express), switching costs (enterprise software), cost advantages (GEICO's low-cost insurance model), and regulatory barriers.

The margin of safety is the gap between intrinsic value and the purchase price. If you calculate a business is worth £100/share and buy at £70, your margin of safety is 30%. This cushion allows for errors in your valuation and unexpected negative events. Graham's original principle: never buy without a sufficient margin of safety.

Buffett holds positions for very long periods — decades in many cases. He famously said his favourite holding period is "forever." This is possible when a business has a genuine moat: the competitive advantage compounds without the investor needing to do anything.

Why His Approach Is Hard to Copy — and What He Recommends for You

Buffett's strategy is extremely difficult to replicate. It requires: an ability to assess intrinsic business value accurately (which requires deep accounting knowledge and industry expertise), the psychological discipline to buy when others are panicking, the patience to hold for decades without being tempted by short-term volatility, and — crucially — the capital base that allows investing at Berkshire Hathaway's scale, which creates access and deal structures unavailable to individual investors.

Buffett himself has been explicit about what he recommends for ordinary investors. In multiple shareholder letters, his will, and public interviews, his advice to the non-professional investor is consistent: buy a low-cost S&P 500 index fund, add to it regularly, and do nothing else. He has wagered and won public bets on index funds outperforming actively managed portfolios. He does not recommend his own approach to non-professionals.

In his own words (2014 shareholder letter): "My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the trust's long-term results from this policy will be superior to those attained by most investors."

FAQs

How does Buffett calculate intrinsic value?

He uses a discounted cash flow approach — projecting a company's future free cash flows and discounting them back to present value at an appropriate rate. He has never published an exact formula. He describes it as more art than science, requiring deep business understanding rather than mechanical calculation.

Why has Berkshire underperformed the S&P 500 in recent years?

Berkshire's size makes it difficult to deploy capital in ways that move the needle. Finding a business worth $10 billion at a substantial discount is much harder than finding one worth $100 million. Scale is Buffett's biggest constraint.

Is value investing dead?

Value investing — buying below intrinsic value — is never permanently dead, but it has faced headwinds in low-interest-rate environments where growth stocks (which benefit more from low discount rates) outperform. The approach still works but requires patience in periods where market sentiment favours growth over value.

Can I do value investing with UK stocks?

Yes. The principles are the same — find high-quality businesses with durable competitive advantages trading below intrinsic value. The FTSE 100 and FTSE 250 contain businesses with genuine moats. The challenge is the same as with US stocks: accurately valuing a business is genuinely difficult.

Key takeaways

Value investing: buy businesses trading below their intrinsic value, with a margin of safety as a buffer against valuation errors.
Buffett looks for companies with economic moats — durable competitive advantages that protect profits over decades.
His preferred holding period is very long — he buys great businesses and holds them while the competitive advantage compounds.
Buffett himself recommends ordinary investors buy a low-cost S&P 500 index fund — not attempt to replicate his approach.
His approach requires deep business valuation expertise, significant patience, and psychological discipline that most investors lack.