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[T800]The Warren Buffet Way

by Ben Needles, Ben

Warren Buffet is considered by many to be the greatest investor of our time. Buffetts philosophy on business investing is a modification of the value investing approach his mentor Benjamin Graham used. Graham bought companies because they were cheap compared to their intrinsic value or book value. He was of the belief that as long as the market undervalued them relative to their intrinsic value he was making a solid investment, like buying a really good house at way under its market value. He reasoned that the market will eventually realize it has undervalued the company and will correct its price, regardless of what type of business or industry the company was in. In addition he believed that the business needed to have solid economics behind it. Buffetts investment style is also heavily influenced by Phil Fisher.

The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:

1) Is the company in an industry with good economics, i.e., not an industry competing on price. Does the company have a consumer monopoly or brand name that commands loyalty? Can any company with an abundance of resources compete successfully with the company? Think Coca-Cola, McDonalds, etc.

2) Are the Owner Earnings on an upward trend with good and consistent margins?

3) Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average?

4) Does the company have high and consistent Returns on Invested Capital?

5) Does the company retain earnings for growth?

6) The business should not have high maintenance cost of operations, high capital expenditure or investment cash outflow. This is not the same as investing to expand capacity.

7) Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?

8) Is the company free to adjust prices for inflation?

Buffett also concentrates on when the best time to buy occurs. He does not want to invest in businesses with indiscernible value. He will wait for market corrections or downturns to buy solid businesses at reasonable prices, since stock market downturns present great buying opportunities.

He is known for being conservative when speculation is rampant in the market and being aggressive when others are fearing for their capital. This contrarian strategy is what led Buffetts company, Berkshire-Hathaway, through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on potential financial gains during the same period.

He also asks at what price is the business a bargain, and his answer typically is when it provides a higher rate of compounded return relative to other available investment opportunities.

Warren Buffetts letters to Berkshire-Hathaway shareholders are a valuable source in understanding his investment style and outlook.

I bet you must have been told at one time or another not to put all your eggs in one basket before right? No doubt diversification is a must but how many stocks you should buy and how much money you should be investing in each stock is depends on these 3 necessary conditions for portfolio diversification.

In return, you'll be having the best asset allocation strategy that will effectively utilize all of your hard earned money now and forever.

How Knowledgeable Are You

To make the most money from stock market, invest in what you know the most. You must know the company inside out. At least, you must understand its business model, which industry the company belongs to and how the profit was generated. Also, don't forget to spend enough time to understand the nature of its business, effectiveness of its management as well as the unique selling proposition of its products or services compared to its competitors.

From there you can decide if the company is a great investment opportunity indeed.

But the main problem that most novice investors have is they don't know where to start. They just don't have idea which stock they know the most. Unlike Warren Buffet who has been taught about stock investing since he was 11 years old, most of us need to start from bottom. You can either start with something you know from your hobby (e.g. computer or software geeks), whatever you have learnt from your office or anything that you are interested in.

Thus, making yourself familiar with the industry results should be one of the top necessary conditions for portfolio diversification. It gives you better understanding of how well the company has been doing so far. And most importantly, what will be its future in years to come. If you are confident with the stocks future profits and cash flow, it becomes less risky for your money to grow.

How Much Money You Have

Obviously, the more money you have the better. Unfortunately, not many of us have the same fund as Warren Buffet does, unless you have inherited millions of dollars from your wealthy parents. Even if you do, the money is still not enough. I'll let you know why.

What makes Warren Buffet's investment so different than many of us is that, once he discovered great stocks offered at discounted price, he will buy not only millions but billions of dollars. His stock purchase alone is sufficient to make the stock prices moves significantly that time.

With that kind of investment, he has enough votes to influence the company's direction. For example, his holding company, Berkshire Hathaway, owns more than 15 per cent of all the outstanding shares of Coca Cola. As the matter of fact, he has been sitting on the company's board for at least 17 years.

You tell me who else have the luxury of sitting in the board of management.

Therefore, just because concentric diversification has worked well for Warren Buffet, it is not necessarily worked well for you; unless you have billions of dollars investing in such companies though. Therefore, as much as possible, allocate huge (if not most) of your asset into something that you have the most control. This can either be your real properties investment or starting up your own businesses.

Article Source : Warren Buffet Investment

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Both Ben Needles & Zainul Anuar are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Ben Needles has sinced written about articles on various topics from Business Credit Cards, Anger Control and Business Credit Cards. About the Author (text)As a new investor, it is important to learn as much as you can about beginner investing strategies. For more information about investment strategies, go to:. Ben Needles's top article generates over 550000 views. to your Favourites.

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