Investing in Warren Buffett Stock Method

When we remember the investment, it must be the first thing that comes to mind "Warren Buffett," that giant billionaire and student of the successful Benjamin Graham, the greatest investor and financial expert in history . Buffett is a stand-alone school in the art of investing in stocks. He has laid down solid foundations for successful investment in stocks and applied them accurately. He has reached a huge figure equivalent to the gross domestic product of a number of countries. His wealth is more than $ 90 billion, Note that he did not benefit from any legacy, or internal information or privileged relations or even a job with a large salary! Buffett says there is no secret to wealth building, and any investor can make a fortune if he follows the same principles and methods that Buffett used.

Buffett is a global phenomenon in the world of investment; to the point that one of the famous authors, Robert Hagstrom, has written his famous book Warren Buffett Equity Investments, which includes Warren Buffett's principles and techniques of equity investment, which are indispensable to any investor or interested in this. the field. In order not to linger on you, come and browse this interesting book, which sold about 1.5 million copies, and we stop at some of the precious jewels of those interested in investing their money in an effective way.
 

Book investment in Warren Buffett stock method Warren Buffett

Warren Buffett's investment in shares examines Buffett's investment strategy in building his wealth. He summarizes it in four main rules: business rules, management rules, financial rules, and rules for investment in value. We will elaborate these rules in some detail below.

Work rules

What is meant here is that anyone considering buying new shares should look at it as if they are buying a company rather than just a security. This in turn requires the investor to study the work and performance of the company, and answer three important questions, namely: Is the nature of the work of the company understandable to him? Is the company reliable and there are indications of its long-term sustainability? Is the company's future development potential available, making investment in its shares profitable in the long term?

Buffett believes that investors' understanding of the company's mechanism is important in making a successful investment decision. It is meaningless to own a company or even to own a company if the investor is ignorant of the nature of the business and the activities on which it is based, because it is nothing more than a controlled gamble They fail. Buffett, on the other hand, does not care about the shares of companies that are suddenly rising. What matters to him is the shares of those companies that can sustain and develop and make profits over a long period of time.

As for the future prospects of the company, Buffett believes that it can be judged by three conditions, called the "trench": the nature of the products and the market need for them, and that these products do not have a close alternative that completely eliminates them and is not controlled. Therefore, the trench, or the line of defense, expands whenever all these conditions are met in the company, which makes the investment is encouraging and successful.

Rules for management

From Buffett's point of view, it is not enough for an investor to know about the company that will buy their shares, but rather to identify the characteristics of their management and managers. "I do not want to invest in companies headed by managers who lack impressive qualities, regardless of the attractiveness of the company's business or profits," Buffett said. He stresses the need to answer three questions concerning managers: Are they rational? Are they frank and transparent with investors? Can the administration resist institutional and bureaucratic dictates? As for the rationality of managers, it can be judged by decisions about profits and the way they are distributed or invested to develop and expand the business of the company; successful management is how to reinvest the profits of the company to increase its value in the future.

The element of transparency and honesty is illustrated by answering three commonly asked questions: what is the approximate value of the company? How well can they meet their commitments? How well do their managers perform?

An important rule for management is also dictatorial dictates (strict compliance with regulations and instructions), which, in Buffett's view, is a negative element that hinders the company; on the one hand, it can resist change; it may lead to expansions and acquisitions to flex muscles in front of competitors; To submit to institutional dictates to imitate competitors and to grant huge compensation to managers as a show - meaningless - to force.

Financial rules

In order to avoid being caught in the trap of attractive numbers - sometimes manipulated - that do not give a realistic picture of the company's position, the investor should look at the profit rate within five years, and not just the annual reports of the companies. Here the investor must adopt a number of important financial principles:

- Focus on business profits (equity) rather than market (earnings per share): Buffett believes that the earnings per share do not reflect the quality of the company's financial performance, but the return on shareholders' equity, which is the profit from goods or services produced. When this profit is realized, it is reflected on the stock's earnings per share, a real increase resulting from the improved financial performance of the company, not just a bubble caused by random speculation.

- Study owners' profits and not cash flow: Some companies may announce high numbers in cash flow reports with a view to raising their market value. The idea of ​​deception about the amounts to be deducted from annual profits to modernize machines and improvements to maintain economic performance, and of course these delays can be delayed and deducted from the cash flow; leading to high figures; then the investor is fooled. Buffett therefore proposes to use the owner's profit criterion instead of cash flow.

- Investing in companies with high profit margins: Buffett tends to cut costs, he believes they should not exceed a fixed rate for every dollar of income, he follows the method of shortening the workforce to a minimum, and was able to promote the Washington Post as a result of reducing production costs To 80% over five years.

- If the Company has retained earnings to reinstate, the market value of the share must increase at least one dollar. Buffett believes that if the holding of profits for the purpose of re-operation does not result in an increase in the market value of the share by one dollar, it is better to distribute the dividends to the shareholders instead of restarting them because there is no economic feasibility in this case.

Rules of investment in value

The value investment expresses the purchase of the lowest price, its value, its investment and the opportunity to sell it, after the price reaches its real value or more. This depends on two conditions: the determination of the value of the work, and the purchase when the work is offered at a price that is well worth its value. In Buffett's view, the value of the work is the sum of the net cash flows (owners' profits) expected to be realized during the life of the company, discounted at an appropriate rate (10%), which is the ratio proposed to calculate the actual value of the shares. Buffett bought the Coca-Cola company in 1988 in this way and paid five times its book value. He was sure the real value of the company was greater than he paid for its shares. This was one of Buffett's biggest investments. On the other hand, Buffett believes that the most important of all the above is to know the right moment to buy. When the stock market price becomes below its actual value, the time of purchase is ripe. If it turns out that the value of the work is more than the value of the share, albeit a small percentage, it must refrain from buying, even if the price seems tempting.

Buffett's portfolio management strategy

Buffett emphasizes the importance of adopting a rational strategy for portfolio management. While the majority of investors are accustomed to following two strategies: "Portfolio Portfolio Management" and "Effective Portfolio Management", Buffett believes that these two strategies have very little chance of success because they are based on the theory of buying everything today Its profitability can be predicted without profit, and this logic leads to failure, because it is impossible to predict the fate of the market under the complexities of the business world. Buffett proposes an alternative strategy called the "focused investment strategy". The strategy is based on a practical principle that focuses on investments in strong companies rather than on investment diversification. In Buffett's view, the number of companies in which we invest our funds must be between 10 and 20 companies as a maximum. In addition, Buffett advises that the funds invested should not be distributed equally among companies. Most of them should be invested in the more prestigious companies, and the rest should be distributed proportionately to other companies based on their strength and importance. Buffett adds that investment should follow a long-term plan of 5-10 years.

  These were some quick glimpses and brief excerpts from Robert Hagstrom's The Warren Buffett Stock Investment, in which we tried to learn some of the secrets of success for a world-class icon in investment, finance, business and wealth called Warren Buffett.