A good investment policy is one that allows you to profit, reinvest those profits, and follow from a
virtuous cycle of increasing returns over time.
That’s the policy essentially used—in various forms—by Warren Buffett over the decades to become
one of the world’s wealthiest individuals.
Whether buying individual shares of stock or entire companies, the principle is the same. You want to
find companies that can continue to grow over time at a somewhat steady and predictable rate. Growth
companies won’t do. They may end up hitting the skids, and growth companies that fall out of favor
tend to get hammered by the markets.
But companies in mature, steady markets, tend to have slower, but more predictable growth. More
importantly, well-managed companies can throw off plenty of cash flow to investors. Whether
reinvested or paid out in dividends, this cash flow provides new investment opportunities. And those
new opportunities can in turn provide even more opportunities.
Much like compound interest, excess cash flow can allow modest early returns to expand into truly great
wealth. There’s no real secret behind this process, other than buying right and having the patience to see things through. That kind of discipline is what separates Buffett from thousands of failed disciples and others in the investment industry who thought they could outperform the markets hugely and consistently.
Most small investors don’t want to face the big setbacks of a bear market. But using this strategy of
focusing on great cash-flow generating companies can allow investors to learn to adopt one of Buffett’s
maxims: Buy when others are fearful.