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Warren Buffett Strategies – What You Need To Do In 2018

Warren Buffett Strategies – What You Need To Deploy In 2018

 

Warren Buffett Strategies

If you wish to invest like Warren Buffett, then it is important to understand the basic principles he follows for investing in companies. You might wonder how complicated it is to understand the investment strategies that he follows. I’m here to tell you it’s not hard at all, Buffett follows a list of very simple but intriguing investing fundamentals prior to choosing a company.
By carefully following these principles, you will soon be able to buy stocks like Buffett that will turn out to be extremely profitable over the long haul. You may not become as rich as the man himself, but you will definitely increase your net worth following his simple strategies.

1) Buffett finds companies that are undervalued

 

The first step for Buffett is to search out companies that have healthy financial statements in terms of profitability and the annual turnover. But there is a catch, their stocks are undervalued in the market, and the public does not properly foresee the market potential of the company operating so well in terms of its products and services. To understand the scenario, it is important to go through the financial statements of the past five years of the company that you have chosen to invest in. The picture becomes even more clear if you analyze the accounts of the last ten years of the business if it has been in the market for that long. This strategy clearly points out the fact that if you want to invest like Warren Buffett then you have to pick a company that has been operating in the market for at least five years or more. Therefore, the market’s new entrants are a poor strategy for making a safe and worthwhile investment according to Buffett.

 

2) Buffett picks companies with a competitive edge

 

Buffett shows his keen interest in companies that are either enjoying a monopoly in the market, or if they have a product or service which has an edge over the rest of the competitive companies in their industry. Therefore, to buy stocks like Buffett you will have to screen the market for such companies that meet the above-mentioned criteria of being a profitable company, having a monopoly or close to in the industry, and having products that simply trump the competitors.

 

3) Buffett likes consistently profitable businesses

 

Warren Buffett makes sure that any company he invests in is generating profits in a consistent manner. You can find this out by analyzing the past financial statements of the company. A positive  situation indicates that the management is making efforts in improving the operations of the company and for coping with the dynamic external factors prevailing in the market. The profitability can easily be judged by simply looking at the profitability ratios of the business for the past three to five years. Moreover, there are a few other things that you can look at to tell if the company is running smoothly; these include the annual amount of dividends distributed by the company among its stakeholders and the issue of bonus shares to employees. To be deserving of your investment, the company must have the quality of generating huge profits.

 

4) Buffett doesn’t like debt

 

 Buffett prefers the companies that run themselves more on equity as compared to borrowed funds. What this means is that the company  must hold a low debt-equity ratio, which indicates that its earnings will not fall victim to huge interest that is usually charged on debts. Lower debt means that all the earnings made at the end of the year are free from the liability of paying back a principal amount along with an additional amount known as the markup. The most ideal situation that one may find is a huge company running on 100% equity, because the development and growth require huge funds – resulting in borrowing.

 

5) The price must be right

 

It is important to understand this if you want to invest like Warren Buffett; it states that one must evaluate the worth of the shares of a company as per its profitability and see if it is being sold at a rate close to your estimated value. The ideal value that you calculate can also be named as the intrinsic value of the stock and if this value is below the company’s total market capitalization, then it means that the public has undervalued the stock. It is very hard to correctly ascertain the intrinsic value of the company, as it requires skill and a good backhand speculation to turn your observation into a successful investment. However, Warren Buffett does not find it hard to figure out what the company can earn him.

 

According to Warren Buffett, if the intrinsic value is more than 25% of the company’s market capitalization, then it is worthy of investing. But if not, then he stays away from such a company where things might not work out in his favor due to the overpriced asset valuation. Warren Buffett’s intrinsic value calculation is probably the most prized possession of any value investor. In short, Buffett calculate a stocks intrinsic value by estimating the company’s future cash flows and discounting them by a ten year federal note. More about this intrinsic value calculation can be found at a website called BuffettsBooks.

Warren Buffett Quotes

6) You must know the business

 

The most important strategy Buffett uses is to pick a business that you understand well. In simpler terms, select the market that is easily predictable compared to some newly defined markets. Warren Buffett has always opted for companies that are in FMCG, energy and IT business, and have a proven historical record of favorable returns.

 

6) Summing it up

 

On the crux, it would be right to say that to buy stocks like Warren Buffett you have to get a little bit technical. But this is absolutely appropriate, because you will reduce your chances of being left empty handed with no returns. By following the investment fundamentals that Warren Buffett practices for growing his wealth, you will minimize your risks without reducing your chances of a huge return from the investment. Hopefully these starting points have provided a nice foundation for your investment strategies. If you’d like to talk more about Buffett strategies, feel free to drop me a line on my contact page!