Investing the Warren Buffett Way

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the warren buffett wayI try to make it a common practice to head to the library once in a while. I always enjoy learning new things, plus I’m cheap; the library is a great place to feed these two passions!

Naturally, I gravitated toward the investment/money section (as I always do…) and looked over the titles, attempting to grasp some inspiration that would further develop my knowledge of the topic. I saw all the common names: Suze Orman, Robert Kiyosaki, Donald Trump, and of course, Warren Buffett. Today was a Buffett day. The book of choice: “The Warren Buffett Way“, by Robert Hagstrom.

The title certainly seemed fitting since Warren Buffett really compares to no one. His track record is nearly flawless and always appears to beat the market. How does he do it time and time again? Well, he looks at the stock market from a completely different angle than the rest of us. Learn about investing the Warren Buffett way.

If someone were to ask me some important factors when investing in the market, I would have given the typical “intelligent” answer. I would first take a general view of the economy and decide if the overall market was on the rise. I would then take a look at the numbers – the financial statements. Were they a sound company? What is their debt-to-equity ratio? What’s the P/E ratio? And finally, I would take a look at the charts. Hopefully, the stock has just taken its “double-dip” and is back on the rise…

According to this book, Warren Buffett wouldn’t concern himself with any of these things. I think he would have laughed in my face (but in a nice way, because that’s just the kind of guy he is).

Here’s the Warren Buffett Way

1) Turn off the stock market – viewing the Dow Jones Industrial Average is going to tell you nothing about the future prosperity of one particular stock. Ditch the market averages.

2) Don’t worry about the economy – there are plenty of companies that are flourishing in this poor economy, and there are some companies that flop when the economy has never looked better! The general economic reports most likely do not directly impact the stock that you are reviewing.

3) Buy a business, not a stock – Day traders sit behind their computers and study the numbers and the charts. It seems high-tech and we assume they make millions, but in reality, many of them lose, and lose big. Their problem? They are buying stocks, not businesses.

Warren Buffett does not buy a stock that he would not feel comfortable owning for the next 10 years. He looks for businesses that are:

  • simple
  • run by honest managers
  • have good company economics (their product will thrive)
  • a deal (the current price is lower than the perceived value)

4) Manage a Portfolio of Businesses – when you purchase the stock, consider yourself a business owner, not just a stock renter. Don’t be afraid to go to those shareholder meetings and gain a great knowledge in the company in which you are investing. “Wide diversification is only necessary when you don’t know what you’re doing.” — said by the man himself.

I don’t think I’ll forget these tips too quickly. The 4 keys above are so simple, but when put to practice, they have created one of the richest men in the world!

Will you start investing “The Warren Buffett Way?

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Investing Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

10 Comments

  1. There are a number of dangers when an individual tries to invest “like Warren Buffett”. Unless you have millions to invest you can’t buy a business. When he says buy a business he means really BUY the business, as in he has controlling votes. You and I can’t do that. OK, I can only speak for myself, you might have the money to do that. Anyway, I talk all about this “Buffett Way” in my SimpleVesting eCourse. In the end it’s a great system for a large pool of funds or wealthy investor(multi-millionaire). It is not a practical investment method for the individual investor.
    James Fowlkes recently posted..Put Your Investing on Autopilot

    • Warren Buffett certainly does have enough money to buy businesses, but his message is the same for us as well, even if we do not hold enough shares to actually have the controlling vote. We are to mind our shares as if we were running the business. We should know who the owners are and the ethics behind the operation. If we do not, then we are only an average investor.

      I don’t quite understand how you consider these 4 steps to be a dangerous way to invest. His general message is to purchase a business that we can see ourselves still owning in 10 years. This type of investment would be much less risky than a penny stock that we purchase for a day.

  2. In addition, Buffet focussed on two vital factors – intrinsic value and economic moat! His strength comes from his ability to gauge these accurately.
    Moneycone recently posted..Et Tu OptionsHouse

  3. I agree that you want to look at the fundamentals of the company. Its business, its numbers and also its management.

    I do however look at the market for an entry point. Unlike Buffett, I am not all that good at defining a price that I will buy at based on all the analysis of the financials. That’s primarily why I do dividend investing because the companies tend to be stable.

    It’s funny because Buffett would prefer to re-invest the money to grow the companies rather than pay dividends …

    • I hear ya. There aren’t too many people that can do what Warren Buffett does. I still enjoy dividends as well.

  4. What always suprised me is that no matter how bad economy can be, there are plenty of companies that do very well. But their stock also does very well so not everyone can afford to buy them.

    • True true. Sometimes a stock price can get up to $500 or more, and certainly not everyone can afford that!

  5. “a deal” …

    I think this is where it gets difficult. I think that’s where the real skill comes into play, as not everybody can look at a stock price and financial statements in order to determine true company value.

    It’s takes a lot of time and effort to get to that point.
    Trevor @ Financial Nut recently posted..Coach- Inc COH or Aeropostale ARO

    • Very true Trevor. There are different services you can utilize as well though. There are many other sites that give their opinion of a company’s value vs. the stock price, and will also show how they got the numbers! So, there are ways to further your research without having complete knowledge of valuation.


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