In this article, you’ll find information on the stock investing ideas that Warren Buffet wants all stock investors to know, strategy he uses to maximize return, price of stocks that he willing to pay, key financial ratio that is so important to him, type of managers he loves, and kind of management he trusts.
7 Stock Investing Advices for Beginners
This stock market investing advice will help you on how to pick stocks Warren Buffet way.
Stock Investing Advices #1: Simple Business Model
You must understand the business itself or at least like and use it. Warren Buffett likes to patronize/use Nike, Coke and Gillette products and he is a believer of his investments. Have time to read and study the business model and the financial reports that takes only 2-3 hours per day. Invest as if you will buy the business.
Do you know why this is so important?
When come to investing, predicting what will happen tomorrow is something that you can’t live without. Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. So, if you really understand the business inside out, you can project how the company performs 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.
Most companies here in Philippines have investor relation’s page in their websites where you can browse their financial reports.
Stock Investing Advices #2: Wide Economic Moat
In simple terms, it must dominate its market and can somehow dictate its product’s prices. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries. Look out Nike, it has its own market around the world and it can dictate its own product prices regardless of its competition because people buy Nike for its brand. Further, company should finance its capital from operating cash flow and not depending on borrowings. That is why, Warren Buffet love ‘franchise’, for example, Furniture Mart (the lowest cost in the industry), The Washington Post (market dominance and leader), Coke (strong brand name) and Candies (premium priced and high quality products that serve niche market).
How about Jollibee or Meralco here in our country?
Stock Investing Advices #3: Sustainable Growth
Serving the existing niche market is not enough. Instead, Warren Buffet wants the company to grow continuously and exponentially. Therefore, he looks for managements that have the ability to widen their economic moat consistently over the past years. Their businesses must be positioned where the demand able to grow continuously; Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!
Have you heard of the recent plans of San Miguel Corporation and Metro Pacific Investment Corporation?
Stock Investing Advices #4: Excellent Capital Management
The Management should utilize the available resources for the highest return to the company and to its shareholders. Shareholders should be benefited for their investments thru dividends. Management carries the trust of the shareholders, thus, they should act and think as owners too. Moreover, it is better if the management holds a huge number of stocks too, since they will act as true owners and will not think short term but instead, will make sure that the company earns in the next 20 years or more!
Stock Investing Advices #5: Effective Management Team
Invest in company that has honest and capable managers. They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, “we want managers who tell the truth and tell themselves the truth, which is more important”. He loves cost conscious and frugal type of managers who are honest and integrity as well.
Stock Investing Advices #6: Superior ROE
The general rule that it is above 15! Why ROE, and not the other financial ratios? Well,return on equity indicates how effective the management team converts the reinvested money into cash. The higher the return, the more profitably the company can reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.
Stock Investing Advices #7: Buy at Discount Price
After the process of selection, now is the time to buy them! But of course make sure it is below the intrinsic value and you must have the margin safety of 80% discount from the calculated intrinsic value. Warren Buffet has to make sure he buys the stock at the lowest price possible. Have you heard the recent investment of Mr. Buffett on IBM and in these times of Euro and US Debt Crisis? In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else.
If you want to be as successful as Warren Buffet in stock investing, study each point thoroughly. Ignoring either one advice is enough to make you broke in stock market; simply because, in stock investing, due diligence counts.
Intentionally not following the advice proves that you are not ready for investing;perhaps you are just looking for fast cash.