Warren Buffett's Priceless Investment Advice

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over a period of more than 50 years. Why try anything else?

Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study (link opens PDF file) illustrates Buffett's amazing investment genius. During the period from 1980 to 2003, the stock portfolio of Berkshire Hathaway beat the S&P 500 index in 20 out of 24 years. During that same period, Berkshire's average annual return from its stock portfolio outperformed the index by 12 percentage points. The efficient market theory predicts this is impossible, but the theory is clearly wrong in this case -- and, as Casey Stengel said, "You can look it up."

Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette (now owned by Procter & Gamble) and Comcast (Nasdaq: CMCSA). Over the years, Berkshire has owned household names such as Anheuser-Busch (NYSE: BUD), SunTrust Banks (NYSE: STI), and Target (NYSE: TGT). While not every pick worked out, Buffett and Berkshire have for the most part made a mint. Indeed, his investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from razors?

The devil is in the details
So buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies and determining what constitutes a reasonable price. Buffett recommends that investors look for companies that deliver outstanding return on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands alongside consistent or improving profit margins and returns on capital.

How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true worth of your undervalued shares, you begin to earn solid returns.

Do-it-yourself outperformance
Beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values before they'll be able to capture Buffett-like returns. In the meantime, one place to look for stock ideas is among Berkshire's own holdings.

For example, Buffett was busy in the fourth quarter of 2007, adding to his stake in six stocks, and establishing new positions in both GlaxoSmithKline (NYSE: GSK) and Kraft Foods (NYSE: KFT). The Kraft purchase demonstrates that Buffett either had a craving for corn nuts, or he has confidence in the company's restructuring plan to align its operating units and lower costs. Either way, you can buy shares of this fine company at a discount to Berkshire's purchase price.

Another place to find great value stock ideas is Motley Fool Inside Value. Philip Durell, the lead analyst for the service, follows an investment strategy very similar to that of Buffett. He looks for undervalued companies that also have strong financials and competitive positions. This approach has allowed Philip to outperform the market since Inside Value's inception in 2004. To see his most recent stock picks, as well as the entire archive of past selections, sign up for a free 30-day trial today.

If investing in wonderful companies at fair prices is good enough for Warren Buffett -- arguably the finest investor on the planet -- it should be good enough for the rest of us.

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Investing Money Where Your Mouth Is

With climate change awareness increasing and oil prices remaining high, demand for Earth-friendlier products and services is growing. And as businesses change their ways, the business of investing in them is, like so many other things, going green.

Values-based investing isn't a new idea, but it has traditionally focused on avoiding the tobacco and weapons industries and companies with poor human rights records. Of every $10 that's professionally managed, $1 goes toward socially responsible investment, according to the Sierra Club.

Investors are increasingly looking to sustainability-minded stocks for both ethical and financial reasons. "It's a way of putting your money where your mouth is," says Rona Fried, editor of the Progressive Investor newsletter and president of SustainableBusiness.com. Plus it can be a smart way to play the market. Alternative energy, for instance, "is going to grow by leaps and bounds in the next five to 10 years," she says.

As with most investing, diversification is key; pouring your life savings into, say, a single algae-biofuel outfit is no wiser than doing the same with an untested dot-com would have been 10 years ago. "In any hot new area, you want to be careful about following the herd and getting caught in a bubble," says Bruce M. Kahn, second vice president of wealth management at Smith Barney and an environmental scientist.

Green mutual funds are one way to spread your assets, but just how Earth-friendly are they? It depends on your point of view. While some funds focus on alternative energy, recycling and pollution remediation, others invest in large companies such as Nokia, Nike, Starbucks and Staples. These companies pledge to reduce their environmental impact -- which, while commendable, isn't necessarily the same thing as not having much of one in the first place.

Some financial professionals argue that investing in large corporations with forward-thinking environmental policies sets an example for their respective industries, and that such actions have tangible ecological benefits. "As companies embark on this path of becoming better sustainability managers, they become more efficient and also uncover new opportunities," Kahn says. "It's like a positive feedback loop."