NEWSLETTER

Warren Buffett’s

Warren Buffet, one of the world’s most famous investors, believes in certain investment principles which have helped build his empire. In this fact sheet we explore Warren Buffet’s investment principles, and how these can help you in your own investment portfolio.

investment approach

Warren Buffet has been named one of the world’s most influential people and the third richest person in the world with a net worth of $44 billion.

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Few investment successes are as notable as that of world-famous investor Warren Buffett. The 81-year old investment guru has a knack for choosing the right stock and has built a multi-billion dollar empire. Several of the principles that Warren Buffett stands by are common-sense, sound investment guidelines. To follow is an overview of investing – the Warren Buffett way – and some pointers on how to apply these to your own investment portfolio.

Don’t lose moneyIt sounds obvious but it is probably the most important rule of investing, and the most difficult to attain. Recovering from losses in a portfolio is extremely difficult – you first have to recoup your losses

before your portfolio can grow further. How does one prevent losses when you cannot predict performance? One option is to consider some type of portfolio protection against underperformance of market losses. Discovery Invest offers investors a Quartile Performance Protector, which provides a performance boost of up to 20% to one’s investment contribution at the end of every five-year period. Alternatively, you can consider one of Discovery Invest’s Escalator Funds that have a built-in guarantee.

Value investingWarren Buffett is well known for investing for value. He likes to invest in the stock of companies that are undervalued but have good potential for growth in the future. This is done by analysing the underlying

company’s financial statements, and other key indicators, to determine the stock’s intrinsic value. As a personal investor, one cannot analyse the underlying stock of every company within your unit trust funds or portfolio. But you can select a fund manager with a solid track record of picking good stocks and delivering consistent performance. Discovery Invest has chosen world-class investment partners to meet your many different needs. You can choose managers that specifically follow a value approach to investing.

Calibre of the business franchiseAccording to Warren Buffett, intelligent investing means having the priorities of a business owner rather than a stock trader. This means being focused on long-term value rather than short-term gains and

losses. Buffett only buys shares in companies that he would be willing to own outright. He invests only in business operations that he understands, that have favourable long-term prospects and that are operated by honest and competent people. The lesson for a personal investor is to take the time to understand your investment portfolio and choice of unit trust funds and other investments. Ensure you are investing with reputable companies and remain focused on your long- term objectives. Discovery Invest’s Target Retirement Date Funds have the long-term objective of saving for retirement. The Funds automatically adjust the asset allocation of one’s investment, without you having to adjust your risk profile.

According to Warren Buffett, intelligent

investing means having the priorities of a

business owner rather than a stock trader.

DISCOVERY INVESTFUNDamentals DISCOVERY INVEST

Be aware of over-diversificationIt sounds like a contradiction to caution one about diversification when all investment principles espouse the importance of diversification. Buffett believes that diversification increases rather

than reduces risk as it becomes impossible to closely watch “all the eggs in too many different baskets”. There is an important principle to learn, however, which is not to over-diversify one’s portfolio. Choosing a small range of high quality funds is optimal in running one’s personal investment portfolio. Some funds, such as balanced funds, provide diversification within the fund already so it’s important not to dilute your portfolio earnings by choosing too many funds.

Margin of safety approachBuffett is well known for his “margin of safety” approach, which he adopted from Benjamin Graham, a pioneer in value investing. Margin of safety is defined as the difference between the intrinsic value of a

stock and its market price. Forming the basis of value investing, it directs one to buy a stock when its market price is not representative of its full potential value.

How does Buffett apply this? He once wrote in a shareholder letter “there is never just one cockroach in the kitchen” meaning that a business that starts off with one problem will have other problems lurking beneath the surface, therefore, one should target large successful businesses that have the potential for long-term growth, all be it that the potential may not be obvious at first. As a personal investor, one should consider quality above the prospect of short-term gains. If the opportunity of significant short-term gains is presented, one should exercise caution.

Discovery Invest’s fund range aims to meet your different objectives and attitude to risk. The range includes funds that offer varying levels of investment protection. Discovery Invest also offers investment funds managed by leading external asset managers both locally and offshore to give investors a large degree of flexibility. Speak to your financial adviser about the Discovery Invest range of funds, performance protectors and guarantees.

Choosing a small range of high quality funds is optimal in running

one’s personal investment portfolio.

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