You can learn these 5 principles from star investors

Warren Buffett is considered one of the most successful investors in the world. Many investors would like to have his instinct for investments. But are there basic principles that investors can learn from the pros? We asked Daria Diachenko, Head of Investment Strategy & Portfolio Construction (CFA) at asset manager Serafin Wealth Management. The expert reveals five basic principles that every investor can learn from and knows how a model portfolio would be structured in Buffett's style.

“The basic principles that Warren Buffett follows are based on what is known as value investing,” explains Diachenko. This approach involves looking for undervalued stocks, i.e. those whose actual value is above the current market price.

Buffett prefers companies with a clear and lasting competitive advantage, often referred to as an economic moat. He then usually holds the title over a long period of time. “He also attaches great importance to understanding the business model and the quality of the company's management,” adds the expert.

There are five core principles that run through the portfolios of successful investors:

“First, they place great Value the quality of companies“, says Diachenko. This includes companies with stronger Market position, reliable cash flows and sustainable competitive advantagesExamples of this include Warren Buffett's investments in brands such as Coca-Cola or American Express, which are known for their strong customer loyalty and brand dominance.
“Secondly, these investors are characterized by a very long-term perspective “They don't see stocks as short-term speculation objects, but rather as long-term investments in companies. This long-term orientation helps to remain stable even in the face of market fluctuations.
Thirdly, the Diversification an important aspect of their risk management. “Although some, like Charlie Munger, prefer a more concentrated approach, they ensure a balanced portfolio by investing in different sectors and regions,” she adds.
The fourth feature is patience: “Successful investors do not act hastily – they wait for the right opportunity when the price of a security falls below its intrinsic value.” Seth Klarman, for example, is known for remaining patient and waiting for prices that offer a high margin of safety.
After all, all decisions made by professionals are based on a thorough Fundamental analysisThey evaluate companies using hard data and metrics to ensure that their investments are on a solid financial footing.

These metrics are particularly important when selecting stocks

Most investors probably know that there are key figures that can be used to evaluate stocks. But which ones are the most important?

“A crucial financial indicator is the Price-earnings ratio (P/E)that helps identify undervalued stocks. To determine whether a stock is undervalued or overvalued, it is common to compare the company's P/E ratio with the industry average or the company's historical P/E ratios,” explains Diachenko. Buffett, for example, invested in Coca-Cola, whose P/E ratio was often below the industry average when he built his positions.

“Another important factor is the Return on equity (ROE)which measures how effectively a company uses its capital.” Here, too, the ROE is compared to the industry. “Nevertheless, it is also important to observe the stability and growth of one's own ratio. This allows investors to get a comprehensive picture of the company's financial health and performance.” A company like Wells Fargo, another long-term investment by Buffett, for example, traditionally has a comparatively high ROE, which underlines capital efficiency.

In addition, as already mentioned, the Economic Moat or sustainable competitive advantage is also central. “Apple, a newer and currently Buffett's largest investment, demonstrates this through its strong brand loyalty and innovative technologies that differentiate it from competitors.”

In addition, the Quality of management plays a central role. In addition, investors can also rely on the Dividend policy pay attention: “Buffett, for example, attaches great importance to this, since a constant and growing dividend like that of Kraft Heinz or Coca-Cola signals the financial health and shareholder friendliness of a company.”

This is what a model portfolio could look like

A model portfolio based on Buffett's would therefore be primarily focused on long-term capital growth. “The composition of such a portfolio would consist mainly of stocks. This asset class has historically achieved the highest returns over long periods of time,” says Diachenko.

Typically, around 80 percent of the portfolio could be invested in carefully selected stocks. Alternatively, investors who do not want to deal with the analysis of individual stocks can also invest in broadly diversified equity ETFs or funds. “Such a basis could be supplemented with individual stocks as 'satellites' in order to take advantage of specific opportunities and further individualize the portfolio,” explains Diachenko.

It is even more important to remain emotionally stable and not to be unsettled by the daily fluctuations of the market

The remaining 20 percent could be invested in bonds. These could serve as a risk buffer and provide income stability, especially in volatile market phases. Such bonds would typically be issued by issuers with high credit ratings to minimize the risk of default.

“Ratings in the AAA to A range, which are awarded by rating agencies such as Standard & Poor's, Moody's and Fitch, are considered a benchmark for high creditworthiness,” explains the expert. These ratings indicate that the bonds are considered safe and have a low risk of default.

If necessary, a small percentage of the portfolio, around five percent, could also be held in liquid assets such as overnight money. This would enable investors to react quickly to favorable investment opportunities or have financial security in economically uncertain times.

The expert has these tips for investors

“I would recommend focusing on long-term investments. That is, investing in companies whose business model you not only understand, but also resonates with personally,” advises the expert.

Another critical point is the neglect of company valuation, which can lead to buying at high prices

“However, it is even more important to remain emotionally stable and not to be unsettled by the daily fluctuations of the market.” Many investors get carried away by the daily market noise and make hasty decisions that are not well thought out. “Another critical point is neglecting the company's valuation, which can lead to buying at high prices,” she adds.

For investors who do not want to spend a lot of time analyzing individual stocks, ETFs or active funds could also be an alternative.

Disclaimer: Shares, real estate and other investments are always associated with risk. A total loss of the invested capital cannot be ruled out. The published articles, data and forecasts are not an invitation to buy or sell securities or rights. Nor do they replace professional advice.