5 Principles of Value Investing Used By the 20th Century’s Greatest Financial Minds


What do the most successful stock investors in the 20th century have in common? They follow the principles of value investing. Let’s look at some of the main ideas and how they can be applied to real estate. Some might surprise you.

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Start With Cash Flow

“Rule No. 1: never lose money. Rule No. 2: don’t forget Rule No. 1.” — Warren Buffett

You never want to purchase a property if there isn’t cash flow from the start. It has to be profitable so expenses don’t come out of pocket and limit your future investment ability. This might require a sizable down payment.

Keep in mind that cash flow is what is left after all costs are covered, including routine maintenance, bills, vacancies and repairs. You want the property to be able to operate on its own without any financial help.

Buy Value at a Good Price

“Price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” — Warren Buffett

Price is not the end all, value is. I think of value not in terms of total dollars, but rather dollars per hour. Properties in the worst areas tend to have the best cap rates. But how much time and money are you going to spend chasing rents and fixing things because your tenants don’t care about the property? Your goal should be creating a self-sustaining business, not an extra job for your nights and weekends.

Another way to get high value in real estate is to find a property that can be turned into something else more profitable. Everyone compares properties to their immediate rental value because it’s easy. This creates a high demand and low profitability. Not so good for you. You want to be the one creating good deals. If you can see value in property that others haven’t realized, you won’t have much competition.

Related: The Beginning Investor’s Guide to Creating Lasting Value in Real Estate

Buy Safe

“More important than cheap is safe.” — Martin Whitman

Long term success in investing comes from making consistently safe long term investment decisions. Warren Buffet has averaged 20% returns every year for his entire career. Investors thought he was crazy when he didn’t invest in tech stocks right before the dot com bust. Those stocks were flashy, and a lot of people jumped in for the quick buck. While millions of people lost their retirement, he made a 20% return by investing in paint companies, roofing companies and carpet companies. Why? Because no matter what’s happening, those things still sell.

“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” — Warren Buffett

Investors like Warren Buffet, John Templeton and Marty Whitman didn’t get to be billionaires chasing “too good to be true” deals. They focused on things that brought in consistent income so they could forget about it and focus their energy on the next deal. They wouldn’t have had time to do that well if they had focused on short term profitability.

Take a good look at where you plan on investing see if it’s stable. Is long term growth likely? Does the area offer job diversity that will keep the economy healthy? How has appreciation been over the last 10 years, and what is it looking like in the future? Are there quality tenants to pick from? Is there demand for your property? Don’t bet your future retirement on a few extra dollars. Long term success is what’s important. 

Expect Average Returns

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” — Warren Buffett

Everyone wants to be the lucky and find the best deals. I don’t blame you; I do too. But the road to wealth isn’t likely if it requires winning the lottery every step of the way. Besides, a few mistakes from risky high yield deals could end your investment career just as quickly as it began.

If you think you’ll do better than everyone else, you’ll have to take more risk than everyone else. The market and average returns are based on thousands of interactions, with everyone trying to get more than average. While it might happen a few times, it is not something to focus on if you want long term success. And in general, good quality long term investments are not cheap. High risk deals are the cheapest.

Think Long Term

“With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard […] Even now, Charlie [Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” — Warren Buffett

The most important aspect of value investing is investing long term. That’s where you realize the benefits of real estate. Short term high yield deals (usually in risky areas) typically cost you a lot of time and money and therefore limit your future potential. Value investors don’t try to beat the odds at every step, but rather focus on deals they know will finance themselves so they can focus their energy into finding the next investment and let the market carry the past investments with no effort. Don’t invest for 30 years to find out your retirement will be spent holding risky investments together.

Related: Real Estate Investment Advice From Warren Buffett

If you want to succeed beyond what most people are capable of doing, you have to do what they won’t do, which is thinking long term. Take it from the most successful investors mentioned above and focus on the long term low maintenance safe deals, even if they are not the most profitable in the short term.

All of the really successful investors I’ve had the opportunity to meet follow these principles. They focus on long term low risk investments, even if they are less profitable. They spend very little time worried about vacancies and bad tenants because demand is high and rental rates increase every year. For them, investing is easy.

Investors: Which of these principles do you find most valuable?

Leave me a comment, and let’s chat!

About Author

Brett Lee

Brett Lee is a licensed Real Estate Broker in Portland Oregon where he helps people achieve a better future so they can do the things that truly make them happy. Brett is also a buy-and-hold investor, property manager and investment advisor.


  1. Ben Leybovich

    Brett – welcome to the blog, as I am not sure I’ve seen you here prior. Excellent way to start, Brett! I am somewhat infamous here as it relates to the discussion of $30,000 PIGS – I don’t buy them and I caution others not not. They are an example of something that while cheap also lacks intrinsic value…

    Very good!

    • Shaun Reilly

      While your thoughts on Pig farming have been pretty clear recently I was thinking you were going to take him to task for this comment:
      “You never want to purchase a property if there isn’t cash flow from the start. It has to be profitable so expenses don’t come out of pocket and limit your future investment ability. This might require a sizable down payment.”

      I think of large down payments to buy cash flow as kind of being your kryptonite… 🙂

      It isn’t hard for a fool to turn a bad deal into a cash flowing “asset” by pumping a lot of cash into it to bring down financing costs.

      Overall a really good article, just that one point made my skin crawl a little. 🙂

  2. Andrew Syrios

    For any buy and hold investment, number 1 is key. I think a deal has to cash flow or it doesn’t make sense. I would go as far as to say that perhaps with the exception of a few exceptional circumstances, if you buy a property that doesn’t cash flow for the sake of appreciation potential, you’re really not investing, you’re speculating.

  3. Pat Danaher

    Thanks for the article, it was a nice read. One question relating to your statment: “Take a good look at where you plan on investing see if it’s stable. Is long term growth likely? Does the area offer job diversity that will keep the economy healthy? How has appreciation been over the last 10 years, and what is it looking like in the future?” How do you evaluate “Is long term growth likely” and “…and what is it (appreciation) looking like in the future”? How do you determine what the future will look like in growth and appreciation? I have always had a hard time figuring out what to look for to evaluate the future state of those variables.

  4. Jiri Vetyska

    Thanks Brett, great article!
    I could say I wish I read this sooner, when I was young and chasing after every craze of the time.
    Thankfully, such experience is invaluable and guides me on the right path now.
    So it may all come with age, when we are young, we want excitement and quick profit and we don’t necessarily care for long term, because we haven’t lived long enough to understand what it means long term. After 30, I think we’ve been through enough and start to understand that what we’ve done for the past decade, we’ll have to do for another three or more and start to think about real investing more seriously.

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