By Janet Lowe, Author, Warren Buffett Speaks (Wiley) 

At the 2007 Berkshire Hathaway Inc. annual meeting, billionaire investor and company chairman Warren Buffett put a new spin on an old adage: "Welcome the new, keep the old, one is silver the other is gold."

For decades Buffett has delivered simple, old-fashioned messages based on what he learned from his mentor Benjamin Graham. These principles are laid out in Graham's classic, 50-year-old book Value Investing:

  • Seek intrinsic value. Although Buffett is a stickler for knowing roughly what a company is worth before investing in it, his company has become so large and complex that most analysts admit that they can't determine its intrinsic value.

  • Build in a margin of safety to your investment decisions, allowing room for errors in judgment. Buffett often says that quality companies with a corner on the market, or franchise value, strengthen the margin of safety.

  • Don't be swayed by market moods. The irony here is that it is Buffett himself who creates market movements. On a recent trip to South Korea, three companies he praised surged in price and South Korea's broad market index, the Kospi, rose 2.2 percent the day after he spoke.

  • Understand the damage caused by inflation. If your investments don't perform better than the inflation rate, you get poorer all the time.

  • Stick with investments you understand. This caveat applies equally to investment vehicles, industries, and when choosing an investment manager.

  • Invest for the long term. For core holdings, Buffett says his preferred holding time is forever. Not all of his holdings can be categorized as core though, and he's sometimes in and out of an investment in a few months to a few years. One thing is for sure, day trading is not his style.

Private Investors Can't Always Follow the Buffett "Model"

With these guidelines in mind, Buffett's followers study the investments he buys and sells, hoping to duplicate or at least approximate the performance of the man considered to be the world's greatest investor. These loyal followers stick with Buffett for years, thanks to the solid wealth he builds for them. Recently, however, they've seen some new tricks. The atmosphere in which Buffett invests has changed in many ways, impelling him to apply Graham's fundamentals to a different kind of company than Graham ever imagined, and to a vastly different investment climate.

His admirers are seeing that as Berkshire grows in size and sophistication, it is increasingly difficult to mimic Buffett. He is unable to take small positions no matter how promising a company may be, forcing him to ignore many lively prospects. But he comes up with other ideas. Often when a company meets his investment criteria, he buys it outright in a deal that offers the sellers considerable tax advantages. Thanks to Berkshire's hefty cash reserves, he structures clever preferred stock and bond deals with major corporations in need of cash infusions. Individual investors can't possibly duplicate these last moves on their own.

Some New Strategies

To complicate the matter, Buffett, who used to say he didn't understand high technology and saw no need to wander beyond domestic markets, seems to be straying from those paths. He has taken positions in technology companies. He's hedging foreign currencies against the U.S. dollar, buying whole companies in Israel and investing in the British, Korean, and Chinese stock markets.

Some critics insist Buffett has scuttled value principles. They say he is at a loss as how to invest Berkshire's mountain of cash and so takes more risk as Berkshire grows corpulent. Not at all. Even in his late 70s, Buffett is plenty smart. He continues to learn and grow, spinning his investment fundamentals in new ways.

Buffett shifted his attention to foreign currency and stock markets in the early years of the new century partly because U.S. investments were overpriced, but also because he says the U.S. trade deficit has a negative impact on the strength of the dollar. Even so, he has not abandoned America. He continues to search for U.S. bargains and enter domestic deals that benefit Berkshire shareholders.

Value Principles are "Portable"

Warren continues to preach the same sermon. He's just telling us that value principles are portable. They travel well and can be applied when enough information is available. They apply as equally to the Korean steel company Posco as they do to the U.S. railroad, Burlington Northern.

We may not be able to fully imitate Warren Buffett, but we can continue to study the master, to think about his lessons, expand our circle of competence, and look to ever-widening horizons. Keep in mind that Buffett tends to ignore the moods of the market. Here is a quote that aptly applies to today's environment:

"The future is never clear; you pay a very high price in the stock market for a cherry consensus. Uncertainty actually is the friend of the buyer of long-term values."

(Copyright Janet Lowe)