The Warren Buffett way of investing

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Legendary Investor Warren Buffett has a very simplistic approach for investing in stocks, In this post I would expalin the Warren Buffett way of investing in details, If one has to become a very good investor he should stick to these 4 step approach for choosing stocks and then becoming millionaire from it. We all know that Warren Buffett has made a fortune of 56 billion from stocks and share market investing. We are seeing Buffett type investments being done by some big indian investors already. So definitely this Warren Buffett way of investing would be helpful to potential investors and new investors who want to make a career in stock investing. Remember that one doesnot have to follow thick investment banks manuals because as Buffett says "there is nothing scientific about valuing a stock".

The whole Warren Buffett way of investing would be covered in four posts where each post represents one step for investing in Stock markets. Remember these steps are for pure investors and speculators or short term investors please excuse.

These four steps are:

 Step 1 : Turn off stock market
Step 2 : Don't worry about the economy
Step 3 : Buy a business, not a stock
Step 4 : manage a portfolio of businesses

 Follow these steps one after another and dont skip any step while purchasing a business. If the company fits well after all these steps then go ahead and buy that business. HAPPY INVESTING!

Warren Buffett Way : Turn off stock market

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According to legendary investor Warren Buffett this first step is the most difficult step to take by the investor, So try understanding it in minute detail and one should understand it very deeply. It reads : TURN OFF STOCK MARKET. reading it one might think this is weird how can a stock market investor turn the stock market news/movements off....but it is the most essential requirement while purchasing a business. I think once you read this full post you will definitely agree with this step and would feel that it is not that difficult to implement but requires sheer analytic ability.

Remember that stock market is manic-depressive, Sometimes it is wildly excited about future prospects and sometimes it is unresonably depressed(like 1929 and 2008-2011), Such times are best for grabbing the oppurtunity to invest in shares of outstanding businesses which are probably undervalued in these depression times, But as you would not take direction from an advisor who has manic-depressive tendencies, you should also allow stock market to dictate you actions to take. The stock market is not a preceptor, it exists merely to assist you with the mechanics of buying or selling shares of stock. If you believe that stock market is smarter then you are, give it your hard-earned money by investing in index funds. If you have a sound understanding about the business you want to invest in then TURN THE STOCK MARKET OFF.

If a potential investor plans to own shares of an outstanding business for long term then what happens in stock market on daily basis is rather inconsequential. You will rather be surprised that in this way your portfolio weathers nicely without constantly looking at the market. You can give a test to trust this way of investing. Turn off the stock market for 48 hours, don't check newspaper, business channels or any other business media related to stock market. If after 48 hours your investments are holding good then turn off the market for 3 days than for a week and gradually you would feel that looking stock market daily is a fools game. The bottom line is that Stock market should not dictate price of your stocks. The same holds for institutional investors and individual investors also. You need to see stock market only when you are ready for next investment and want to know "Has anybody done anything foolish lately that allows you an oppurtunity to buy another good business at great price".

Step 1 : Turn off stock market
Step 2 : Don't worry about the economy
Step 3 : Buy a business, not a stock
Step 4 : manage a portfolio of businesses

Warren Buffett Way : Don't worry about economy

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The second step in Warren Buffett way of investing is DONT WORRY ABOUT THE ECONOMY. This is related to first step as Buffett says worrying about both stock markets and Economy are inconsequential. Investors should not worry about whether economy is growing or in recession, interest rates are growing or falling. If you do then stop it immediately, don't waste your energy in analysing the economy. There are two reasons for this: First: No one has economic predictive powers any more than they have stock market predictive powers. Second: If a person selects stock which would benifit by particular economic environment then he is inveting speculation.

Always look for business that has potential to profit from any economic environment, only percent returns may vary to a little extent. One should spent quality time while analysing the business.

Step 1 : Turn off stock market
Step 2 : Don't worry about the economy
Step 3 : Buy a business, not a stock
Step 4 : manage a portfolio of businesses

Warren Buffett Way : Buy a business, not a stock

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This step has a proper methodology to follow. Warren Buffett way says that a person should always buy a business and should not use stock or some other weird name. Invest in simple businesses: You should know how the business makes money, most of the investors put their money in companies without knowing how it earns money. One should have a clear answers of following questions relating to the business you want to invest in.
1. Is business simple and understandable?
2. Does the business have consistent operating history?
3. Does the business have favourable long-term prospects?

From company's management point of view following answers should be clear in one's mind
1. Is board of directors rational?
2. Is Board/management candid with shareholders?
3. Does management resist the institutional imperative?

 Investor should understand finances of the business and no doubt regarding same should be present
1. Management focus on equity, not earnings per share.
2. calculate "owner earnings"
3. Look for companies with high profit margins
4. For every rupee retained make sure the company has created at least one rupee of market value.

 Stock market valuation
1. What is the value of business, one should make sure that the business should be undervalued at time of purchasing.

Step 1 : Turn off stock market
Step 2 : Don't worry about the economy
Step 3 : Buy a business, not a stock
Step 4 : manage a portfolio of businesses

Warren Buffett Way : Manage a portfolio of Businesses

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Warren Buffett believes that diversification in investing is required when investor does not know what it is doing. Investors can measure the economic progress of the business by multiplying the earnings per share by number of share you hold. Maintain a portfolio of companies that in ten years, will produce highest look through earnings calculated as explained above. If you hold portfolio of about ten businesse you would not sell your best businesses, this is similar to working of a CEO who during crucial times sell less performing stocks while keeping best performing companies with him. Avoid purchasing marginal businesses if you have cash reserve. if a company doesnot fit completely or pass after following these four steps then you should not purchase the stock. Just restrict yourself in making few smart investments rather then going and making hundreds of risky investments. HAPPY INVESTMENT!!

Step 1 : Turn off stock market
Step 2 : Don't worry about the economy
Step 3 : Buy a business, not a stock
Step 4 : manage a portfolio of businesses