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Investing Like Warren Buffet in the Stock Market

in Investment
Warren Buffet

Investment Style of World’s Most Successful Investor – Warren Buffet

Warren Buffet is one of the world’s most successful investors in the stock market if not the most successful investor.

His investment style is simple but not easy to copy

Warren Buffet has accumulated a personal fortune and has also given generously on a massive multi-billion dollar scale.

That personal fortune has been made almost entirely from Stock Market investing and Berkshire Hathaway has an enviable long term record for delivering superior results.

Much has been written about Buffet and his investment style but it is not consistent and Buffet himself has never tried to set the record straight, even in his latest biography.

Warren Buffet Investment Style

There are a number of authors that have written about Warren Buffet’s investment style such as Robert G. Hagstrom, Mark Tier, James O’Loughlin, Janet Lowe, Lawrence A. Cunningham, David Clark, Alice Schroeder and Mary Buffet.

From these there is broad agreement that Buffet’s investment style is:

  • Investing in the stock market is the long term investment in a business, not just buying shares for a fast turn on the market price
  • Value based in approach with a margin of safety, think Benjamin Graham
  • Identifying a business with a clear franchise, such as Coca Cola
  • Focused on his circle of competence. Buffet famously avoided the technology boom and bust because he did not understand the business model and consequently how to value the business
  • Finding great companies. Charlie Munger, Warren Buffet’s long time business partner has apparently strongly influenced Buffet’s style and being prepared to pay for good quality or outstanding companies
  • Focused on a concentrated portfolio of a few businesses, as opposed to a diversified portfolio using concepts from the efficient market theory
  • Being greedy when others are fearful and being fearful when others are greedy. Some of Buffet’s most famous investments have been when particular stocks have fallen on hard times temporarily such as GEICO or American Express

Investing Like Warren Buffet

Investing in a business is investing like Warren Buffet; focused on finding a few great investments that will form the majority of the portfolio:

  • Intrinsic value of a business. A great business, with a strong franchise, is independently valued using business tools such as discounted cashflow. No use is made of complex valuation calculations using equations. No use is made of technical market analysis such as Elliott Wave or the host of other technical chart patterns
  • Margin of Safety. Buy a great business at a good price, typically when a company is experiencing temporary difficulties or is suffering like other businesses from a general market downturn. Buffet has often been quoted as liking to buy 1 dollar of value for 70-80 cents, which represents a margin of safety
  • Limit transaction costs by buying and holding shares for the long term and avoid being overly influenced by short term fluctuations in the share price or overall market

World’s Most Successful Investor

Warren Buffet has been identified by many as the World’s most successful investor.

Whilst he has written many essays and talked extensively to investors including at the Berkshire Hathaway AGM there is still a mystique about his investment style because it is extremely hard to duplicate the results.

The investment style is known – and simple – but it is not easy to practice it. It is even harder to produce similar results. In short, be patient and use market opportunities to buy great businesses at good prices.

Increasing Correlation and How it Affects Stock Market Strategies

in Investment
Globalization

Globalization and ETFs are Changing Markets

Increasing volatility and correlation are changing investment fundamentals. This article outlines stock market investment strategies using ETFs.

The proliferation of growth of Exchange Traded Funds ETFs and the increasing economic inter linkage of the global economy are believed to be behind some fundamental changes in financial markets.

In particular, correlations are seen as being on the uptrend. Stock correlations with their index and sector are seen as rising, as is the correlations between asset classes. Keep Reading

Evaluate a Company by Relating Its Stock Price to Earnings

in Investment
Stock price manager

Master Price-to-Earnings Ratio

By analyzing the price-to-earnings ratio, investors can evaluate a company’s shares within the context of actual income the company has generated over a certain period.

One of the most popular tools that analysts use to determine whether a company shares are overvalued or undervalued is the Price-to-Earnings (P/E) ratio.

The reason why is that investors are very interested in knowing what is the present value of their future returns.

In other words, investors can evaluate a stock by determining how much they are willing to pay today for the company’s expected earnings in the future. Keep Reading

Pure Price/Volume Techniques

in Investment
Stock Charts

Much Can Be Learned from Stock Price and Volume Movements

In this article there will be talk of the Dow Theory, other technical indicators, as well as the basics of charting.

While it may seem technical analysts are fond of analyzing and interpreting only price patterns, the majority of technical trading rules consider both price shifts and shifts in the corresponding trading volumes.

It only makes sense to see a confirmation of a trading rule in actual buying and selling of a security in sufficient volumes. Keep Reading

Stock Market Guide for Beginners

in Investment
Stock-market Guide

How to Classify Stocks

Categorizing Stocks by Sector, Size and Index

There are so many thousands of public companies that finding a place to begin stock picking can be overwhelming.

Fortunately, stocks can be categorized in various ways, of which the most common are sector or size.

Classifying Stocks by Sector

It is possible to narrow the stock search by only focusing on the sectors which appeal, i.e. those that are already known and understood, or those that carry the appropriate level of risk.

While each company should be assessed individually, it is fair to say that some sectors are inherently riskier than others. For instance, the gambler may decide to invest in a mining exploration company. If it strikes gold, the investor will have hit the jackpot.

On the other hand it might explore for years and never find a commercial deposit. The investment could turn out to be worthless.

Other companies, like those in the food or banking sectors, are geared toward building up steady growth in sales and profitability. This should generate steady returns for investors, which is considered lower risk. Keep Reading

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