Have You Tried Investing the Warren Buffet Way?

08 March 2023
8 min read
Have You Tried Investing the Warren Buffet Way?
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You must be a caveman if you have not heard of Warren Buffet. So, Who is Warren Buffett?

He is one of the most successful investors and Berkshire Hathaway's CEO. He constantly ranks high on Forbes' list of billionaires and is one of the wealthiest persons in the world.

You can also invest like Warren Buffett. In reality, the Oracle of Omaha's straightforward approach to investing surprises many novice investors. For example, when outstanding companies sell for less than their intrinsic values, Buffett invests in them and keeps the investments for as long as they are still outstanding.

Of course, the story is more complex than that. In this post, we'll delve more into Buffett's approach to investing, offer some examples of how he's put it into effect, and list the stocks he does (and doesn't) own.

Warren Buffett's Investment Philosophy

Buffett obeys the Benjamin Graham school of value investing. Value investors search for stocks with unreasonably low prices relative to their intrinsic value.

Although there isn't a single, widely accepted method for determining intrinsic value, it's typically determined by looking at a company's fundamentals.

The value investor, like bargain hunters, looks for equities they think the market to be undervalued or for stocks whose value is acknowledged by a few buyers but which are nonetheless valuable.

Buffett elevates the value-oriented investing strategy. Many value investors reject the idea of an efficient market (EMH).

According to this hypothesis, stocks always trade at their fair value, making it more difficult for investors to buy undervalued equities or sell them at overpriced prices.

They are confident that the market will eventually begin to favor the high-quality stocks that were formerly undervalued.

Tip: Warren Buffett has repeatedly emphasized the importance of investing in oneself to succeed. It entails making wise financial decisions and learning more about the pursuits you want to indulge in.

Buffett, though, seems unconcerned with the stock market's complex supply and demand dynamics. In actuality, he isn't interested in the stock market's operations.

It is the implication of his famous translation of Benjamin Graham saying: "In the short run, a market is a voting machine, but in the long run, it is a weighing machine."

He evaluates each business holistically and makes stock selections entirely based on the business's prospects. Buffett considers these equities a long-term investment because he prefers to own high-quality companies with a strong track record of creating profits rather than pursuing financial gains.

Buffett doesn't worry about whether the market will eventually recognize a company's value when it invests. Instead, he is worried about the business viability of that corporation.

Buffet's Methodology

A large part of Buffett's investment strategy is proprietary, so we don't know precisely how he analyses investments.

However, the following are some of the most critical Buffett trading principles you can use in your investing perspectives-

  • Company Performance

Occasionally, return on equity (ROE) is the stockholder's return on investment. It displays the amount of income that shareholders receive from their shares.

To determine whether a company has regularly outperformed other businesses in the same sector, Buffett always looks at ROE.

ROE is determined by:

ROE = Net Income ÷ Shareholder's Equity

More than a year's worth of ROE data is required. The investor should look at the ROE over the previous five to ten years for historical performance analysis.

  • Company Debt 

The debt-to-equity ratio (D/E) is yet another crucial factor that Buffett carefully evaluates. Buffett prefers a small amount of debt because it ensures owners' equity, rather than borrowed funds, is used to generate earnings growth.

The formula used to calculate the D/E ratio is:

Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders' Equity

The greater the ratio, the more debt is used to finance the company's operations rather than equity. This ratio demonstrates how much equity and debt the company utilizes to finance its assets.

A high debt-to-equity ratio might lead to erratic revenue and expensive interest costs. As a result, investors occasionally substitute only long-term debt for total liabilities in the formula above for more proper scrutiny.

  • Profit Margins

A business's profitability depends on having a healthy profit margin and constantly raising it. Net income is divided by net sales to arrive at this margin.

Therefore, investors should look at historical profit margins going back at least five years.

A high-profit margin shows that the company is running its operations successfully, but rising margins show that management has effectively and successfully kept expenses under control.

  • Is the Company Public?

Buffett usually only takes into account businesses with a minimum 10-year history.

Because of this, most technology companies that have gone public in the last ten years would not be on Warren Buffett's radar. Nevertheless, he has claimed that he needs to comprehend the workings of many modern technology companies and only invests in businesses he completely grasps.

Finding companies that have endured the test of time but are now undervalued is necessary for value investing.

Essential: Unlike technical investing, which considers a stock's price, volume, and past price movement, value investing focuses on a company's financials.

Make sure to value the importance of past results. It illustrates the company's capacity to raise shareholder value or lack thereof. But bear in mind that a stock's past performance does not guarantee its financial future.

Finding out how well the company can do in the future is the responsibility of the value investor. Unfortunately, it is difficult to determine this. Buffett is quite skilled at it, in any case.

It's vital to remember that public corporations must publish regular financial statements with the Securities and Exchange Commission (SEC).

You can use these documents to examine crucial firm information, such as recent and historical performance, and then use that information to make critical investment decisions.

  • Commodity Reliance

This question is a bold approach to narrowing down a company at first. Buffett, on the other hand, considers this a critical question.

He is wary of companies whose goods are indistinguishable from those of competitors and those that rely primarily on commodities such as oil and gas.

Warren Buffett sees little difference between a company and another in the same industry if it does not provide anything unique. Buffett refers to a company's economic moat, or competitive advantage, as any feature that is difficult to imitate.

The larger the moat, the more difficult it is for a competition to obtain market share.

  • Is It Cheap?

It is the real kicker. Finding companies that fit the other five criteria is easy; evaluating if they are undervalued is the most challenging aspect of value investing. And that is Buffett's most valuable skill.

To test this, an investor must calculate a company's intrinsic worth by examining a variety of business metrics such as earnings, revenues, and assets.

And a firm's intrinsic value is frequently greater (and more complex) than its liquidation value, which is what a company would be worth today if it were broken up and sold.

The liquidation value excludes intangibles such as the value of a brand name, which is not immediately disclosed on the financial records.

Warren Buffett compares the company's intrinsic value to its existing market capitalization—its current total worth or price.

Doesn't it sound simple? But, on the other hand, Buffett's success depends on his unrivaled ability to determine its underlying worth precisely.

Unfortunately, while we may define some of his criteria, we have yet to determine how he achieved such accurate mastery of value calculation.

Investment Advice

Apart from knowing the things Warren Buffett looks at while investing, these are the things he advises-

  • Buy a Stock Forever. No, We're Not Joking.

Warren Buffett follows and believes in the buy-and-hold strategy. He believes that excellent businesses are challenging to find, and once someone has got hold of it, they should hold it for years to reap its optimum benefit.

As he famously quotes, "Our favorite holding period is forever."

  • Diversification is Deworsification

Though average retail investors allude to the fact that diversification is essential when playing in equities, Mr. Buffett does not belong to this school of thought.

Instead, he believes in holding a few specific stocks in one's portfolio for a longer time horizon. He has been following this since his early investment days.

  • Refrain From Agreeing to Every News Article That Comes Your Way.

Mr. Buffett believes that market news creates hype or noise around a particular stock, and one or two-quarter results do not reflect a company's long-term performance.

Keeping this philosophy in mind, Buffett always advises investors to ask whether such performance or negative news will impact the company's long-term earnings power during such times.

If not, the investors should continue holding the stock.

Top Warren Buffet Investments

  • Apple, Inc. (AAPL)
  • Bank of America (BAC)
  • American Express (AXP)
  • Chevron (CVX)
  • Coca-Cola (KO)
  • Kraft Heinz (KHC)
  • Occidental Petroleum (OXY)
  • US Bancorp (USB)
  • Hewlett Packard (HPQ)
  • Nu Holdings (NU)

Which Stocks Does Warren Buffett Avoid?

Buffett avoids investments that he does not fully grasp.

For example, Berkshire Hathaway's portfolio lacks numerous high-growth technology companies or biotech stocks. They aren't necessarily poor companies or expensive, but Buffett understands his stock-picking strengths.

One final point to remember is that just because Buffett avoids a particular area or industry does not imply that you should as well. You can invest like Warren Buffett by sticking to what you know.

Conclusion

You probably won’t be able to implement all of Warren Buffet’s policies, but you can implement some. And if you implement them well, they can make a massive difference to your investments.

So analyze your investments. Save, invest, Groww.

Happy Investing!

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