Invest like fabled investor Warren Buffett by looking for long-term fundamental value

If you want to invest like Warren Buffet, you have to take a broad view in making investment decisions—with a focus on fundamental value.

Technical analysis and other narrow views do sometimes may seem to “work” at times, of course. But they never work consistently. Instead, they run hot and cold. As with all random events, their successes occur in bunches.

These bunches of successes come in random lengths, with random beginning and end points. It’s easy to see how this applies with technical analysis, which has an arcane air about it. But the same principle works for something as straightforward and commonsensical as, say, value investing.

Value investing fans zero in on financial statistics and ratios as an indicator of what to buy. They like to buy stocks with low ratios of stock price to per-share earnings, cash flow, sales and book value.

They assume that if you get enough value in your stock buys, indicated by low numbers in these ratios, your profit is virtually assured, in the long run if not in the short. The problem is that while a 9.0 p/e is attractive, the price can still drop enough to cut the p/e down to, say, 7.0. Then too, a low p/e is no guarantee that the “e” or earnings won’t drop. (When the ‘e’ drops, the p/e automatically shoots back up again.)

In fact, a low p/e and other low readings in value-investor ratios may simply mean that well-informed investors are selling the stock and pushing down the “p” or stock price. If so, it probably means they see flaws in the company’s situation or outlook that investors generally are missing.

Value investing gained a great deal of name recognition and respect because of its association with investing legend Warren Buffett. But Mr. Buffett’s investing success rests on far more than a mastery of financial ratios.

Buffett’s first great investing achievement was to sell all his holdings in 1969, just prior to the early 1970s market downturn. He felt that 1969 stock prices were simply too high, from a value investing point of view. He re-entered the stock market in 1974, after prices had collapsed by 40% or more. This alone established his investing-legend status. Since then, he has achieved a better-than-average investing record by buying large stakes in a handful of well-established companies.

Mr. Buffett mainly invests through Berkshire Hathaway, a New York Exchange-listed holding company that he controls and includes Wells Fargo, Costco, IBM, American Express, Procter & Gamble, and Wal-Mart..

Value investing played a role in Buffett’s investment success, of course. But he owes a great deal to his one-time, 5-year departure from the market in 1969. However, the main contributor to his success is his history of excellent stock-picking, and his practice of holding his top picks for a long, long time.

One thing you won’t find in the making of Buffett’s stock-market fortune is a history of relying on any single investment theme or gimmick.

If you want to invest like Warren Buffet, you need to have some understanding of value investing, some knowledge of technical analysis, and some knowledge of a variety of other tools and shortcuts. But virtually all successful investors take a broad view, and apply everything they know to their investing decisions.

As the saying goes, if you’re going to play the game, you might as well look at all your cards.

Do you invest like Warren Buffett? What other advice has he shared over the years that has proved useful to your investing? Share your thoughts and experience with us.