by Amanda Harvey
The Warren Buffett stock investing strategy is worth learning from and emulating, as it allowed Buffett himself to become the most successful investor of the 20th Century. Born in 1930 in Omaha, Nebraska, Warren Buffett’s entrepreneurial nature was evident even in his teenage years, starting his early business ventures selling gum and magazines. Buffett also showed an interest in the stock market from childhood, visiting the New York Stock Exchange at the age of ten on a trip to New York. He made his first investment in shares at the age of eleven, buying three shares for himself and another three for his sister in the company Cities Service.
What are the Roots of the Buffett Stock Investing Strategy?
Warren Buffett is a value investor, meaning that he selects stocks based on the intrinsic value of the companies they represent. In fact he advocates focusing solely on the details of the company, and not dwelling on the market conditions, the economy, or other external factors.
He credits a large percentage of his investment style and strategy to the approach of Benjamin Graham, who is considered the pioneer of value investing. The value investing method is based on using fundamental analysis to identify stocks in companies with high intrinsic value which are priced lower than their true worth, or at least priced fairly in comparison with their future earning potential.
The Warren Buffett stock trading approach is so deeply rooted in this principle that there are numerous quotes from Buffett such as the one following which emphasize his conviction about the importance of investing in great companies. “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
What Companies Fit the Warren Buffett Stock Investing Strategy?
• Invest in companies you understand which you can therefore analyze effectively.
Buffet considers a comprehensive understanding of a company to be vital in order to accurately project its future performance. A healthy projection is a prerequisite for investing in the stock.
• Select companies with solid historical data.
In keeping with the Warren Buffett stock investing approach, the company should have a consistent operating history which allows for realistic projections of future success.
How Are Companies Analyzed According to the Warren Buffett Stock Investing Strategy?
The fundamental analysis used in the Warren Buffett stock investing method studies various elements of the company.
• The first element to be evaluated is the management. One important consideration according to Buffett is whether the company is using its revenue wisely by reinvesting in ways that maximize value to the shareholders. Buffett also examines the transparency of management with shareholders, believing that strong management does not try to conceal mistakes. Thirdly, Buffett assesses whether they employ visionary development strategies rather than following the crowd.
• The second aspect of examination is the financial status of the company. Within this area, Buffett favors companies which show a high Return on Equity (ROE). This means that the company has generated a healthy return on the money invested by shareholders. Buffett also prefers companies with low-leverage and a high profit margin. Buffett places importance on a company’s capability to generate income for its shareholders.
• The third assessment made according to the Warren Buffett stock investing criteria is of the innate value of the company and its stock. This appraisal takes into account the factors already assessed, with strong consideration being given to a solid projection of future earnings.
Three Tips for Applying the Buffett Stock Investing Strategy
• Buffett says learning to save is a big part of financial success, and that saving is simply a habit.
• Take it slow and steady. According to Warren Buffett, "It's pretty easy to get well-to-do slowly. But it's not easy to get rich quick."
• Buffett advocates buying rather than selling when the market drops. However, from his perspective this means buying long-term stocks in companies that meet the criteria of his analysis.
A Final Note on the Warren Buffett Stock Investing Strategy
While Warren Buffet’s strategy may not apply directly to some aspects of options trading, there are many principles he offers that can be incorporated into any successful financial management strategy.