How to invest like Warren Buffett | Author: Kalpen Patel | The Capital | June 2021
Hi everyone, thank you for coming back to my blog. I hope you found my last blog interesting and useful, in which I introduced “8 powerful steps to get rid of behavioral finance bias‘.
In this blog, I will show you the rules you should follow so that you can invest like Warren Buffett and gain wealth in the long run.
Warren Buffett is always one of the richest people in the world, and is almost universally considered the greatest stock picker in the world.
Although you may never be worth $50 billion, you can of course learn from “Oracle” and Significantly increase your wealth in the long run.
Although Buffett has never formally written down his process of evaluating and selecting stocks, he can learn a lot from his letter to shareholders.
These rules are consistent with these shareholder letters and should be the rules you should follow:
Buffett’s basic idea is to buy stocks at a price below their value, and then let the rest of the world figure it out eventually.This is often referred to as value investment And it was the cornerstone of his philosophy from the beginning.
·In fact, the remaining rules are actually the rules of these companies.
Buffett prefers companies that are already profitable to companies that might one day be profitable. He uses a variety of methods to determine this.
Some of these include return on equity (ROE), return on invested capital (ROIC), and profit margin.
· roe — Although no one knows for sure, the general consensus is that he wants to see a ROE of 15% or higher.
· Profit margin — In this case, we are talking about net income divided by net sales. Obviously, the higher the better.
Excessive debt is bad for everyone, including the company. If you think I skipped the ROIC above, we are back to it now.
Sometimes, a company’s ROE seems high, but in fact this number is artificially exaggerated. This happens when the company uses debt to pay bills. This is where ROIC comes into play.
· ROIC removes debt from the calculation by adding it back to shareholders’ equity before completing the ROE calculation. You can simply divide the company’s total liabilities by shareholders’ equity. The higher the ratio, the more the company uses debt to grow the company, So be very careful.
· When interest rates rise or credit becomes more difficult to obtain, debt-laden companies may suffer.
Buffett has always attached great importance to the company’s management team. He likes smart, humble management, rather than simply drifting with the flow. He has stated that his company only allocates capital; it does not provide management.
· Traditionally, he would not influence the company’s management, but he insisted on having good management. Ensure that the company you invest in is run by a competent management team.
Buffett refuses to invest in businesses he doesn’t understand. You will find that the business he invested in is relatively simple. He largely avoided technology companies because, as he said, he doesn’t really understand this type of business, but you may know it very well. Only invest in what you can understand.
Buffett seems to hold some stocks before dawn. Before the stock rose by 1%, he had held many stocks for 5 years or more. Value investing takes time; you will have to be patient to see the return, so don’t worry.