How to Invest and Make Money Like Warren Buffett

How does Warren Buffett keep beating the S&P 500 and defy the laws of gravity to keep his sprawling empire and compounding machine―Berkshire Hathaway afloat? What are the secret ingredients of his investment style, that make him one of the richest men on Earth? In this Buzzle article, we try to unravel the Buffett mystique. Advertisement The Unbeatable Compounding MachineFor more than 49 years, Warren Buffett's Berkshire Hathaway has grown at a rate of almost 25% every year. To put things into perspective, if a 60 cm rose bush were to grow at this rate, within 37 years, it would grow to be as tall as the Empire State Building!To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. ―Warren Buffett

The most successful student of value investing guru―Benjamin Graham, pin-up boy of investment managers, the Oracle of Omaha, the unyielding CEO of Berkshire Hathaway, and the grand old sire of American capitalists, Warren Buffett is one of the few billionaires who made a substantial chunk of his early fortune, through pure investing.

The Key Investing Principles of Buffettology
While he started out as a diligent follower of Graham's value investing approach, aimed at snagging companies trading at prices lower than their true value, over time, Warren Buffett has absorbed and assimilated a range of ideas from other master investors, like Philip Fisher, and developed his own. While a legion of analysts have tried to dissect Buffett's approach to discover the holy grail of investing, very few have been able to replicate his success.

The master investor, who bought his first stock at the age of 11, doesn't just buy securities now, but prefers buying controlling stakes in companies, assimilating them into the huge sprawling empire that is Berkshire Hathaway.

Berkshire Hathaway performance compared

Ergo, it's not possible to emulate him, as he casts such a huge shadow on the markets today, that his investments sometimes turn out to be self-fulfilling prophecies due to the high volume of funds he pours in. Even he made his share of mistakes, had missed opportunities, and lost a lot of money in the markets. It is just that he has avoided blunders and learned from his mistakes through clear introspection.

The growth of his company, which has been beating the S&P 500, almost continuously for decades, is testimony to the sound investing principles and mental framework that has helped him choose winners more frequently than others.

Warren Buffett

To sum up Buffett's approach in the simplest of words, he goes after undervalued stocks, with strong financial fundamentals and growth prospects, holding them for the long term. He completely ignores the brouhaha and speculative trends of the market and entirely bases decisions on the study of a company's balance sheet, market impact, and future potential. The prime imports from his approach have been outlined in the following lines.

Invest in what you understand
How do you beat Bobby Fischer? You play him at any game but chess. I try to stay in games where I have an edge, and I never will in technology investing. ―Warren Buffett

Go after your strengths, and invest in what you understand. Big suicidal mistakes in investing occur when decisions are made without a complete understanding of how a business or a particular industrial sector works. Buffett has always restricted himself to investing in businesses that he understands. A prime example is one of his biggest early bets and successes―Coca Cola, a company whose business model and future potential was rightly gauged by him.

In the 1990s, he avoided the Dotcom bubble, by eschewing Internet-based businesses, whose future prospects, he did not fully comprehend. Because he bases his decisions on understanding an industry, instead of relying on hearsay, he has been insulated from the speculation-driven insanity that periodically grips the markets. While this approach has also led to him missing out on a few good opportunities, it has largely saved him from large-scale losses.

Ergo, invest in your circle of competence, it being the set of business sectors whose products and services, as well as market value, are comprehensible to you, through personal experience. Only in this circle, can you have the conviction to make future predictions. While this may not always lead to winning bets, it will protect you from the pitfalls of speculative (the-quest-of-the-next-big-miracle) investing.
Go for companies with highly favorable long-term growth prospects

In the short term, the market is a popularity contest. In the long term, the market is a weighing machine. ―Warren Buffett

Investors like Buffett amass great fortunes as they stay invested for the long term in high-growth companies and have the dexterity to spot them early. All companies start small and the few who can identify their long-term value and prospects at that stage, to invest in them, ultimately reap big returns. When considering a stock, think of it for what it is―an opportunity to buy a quantum of ownership in a business. Evaluate its future potential and financial fundamentals, as well as market demand for its products and services. Invest only in companies that have good long-term growth prospects.
Buy undervalued growth companies

The best thing that happens to us is when a great company gets into temporary trouble . . . We want to buy them when they're on the operating table. ―Warren Buffett

Once in a while, opportunities open up, when innovative companies with high growth prospects get into trouble due to temporary setbacks. Consequently, their stock value suffers, and Buffett has always capitalized on such opportunities where the company is trading at a 20% to 25% discount price of its true book value. He has been known to be greedy and opportunistic during such times, when the market has been fearful about a stock and has earned rich dividends from the recovery of the stock price, in the long term.
Choose companies with stable, consistent, and predictable earnings

Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like. ―Warren Buffett

The value of a stock is dependent on the projection of its future earnings and if they are highly predictable, it makes for a smart bet. A company whose products and services have enjoyed perennial demand and established large-scale market exposure, is bound to do well. Such businesses are the sure-things of the stock market, which may not necessarily post spectacular results in any quarter, but will keep the profit meter ticking steadily.

An example from Buffett's portfolio is Gillette, a market leader in personal care products, primarily including men's razors. Since the 1980s, it has been a household brand with a proven market share. It is known for constant innovation and predictable market earnings. In 1989, Berkshire Hathaway invested US$600 million in Gillette, an investment which grew to US$850 million within two years, besides earning a handy US$52.5 million dividend yield. When Procter & Gamble bought Gillette, Berkshire Hathaway being the largest shareholder, earned a handsome profit of US$645 million.

Another such example is See's Candies, a manufacturer of candy and chocolates, whose products have been in high demand, throughout United States. Berkshire Hathaway's US$57 million investment in the company has earned more than US$1.35 billion, in the ensuing years.
Go for companies with candid, trustable, and capable management

Over the years, as his style of investment has evolved, Buffett, along with his closest business partner, Charlie Munger (Berkshire Hathaway's Vice-chairman) have also focused on looking at the quality and leadership capabilities of the management, provided all other financial parameters check out. A capable, trusted, and candid management is bound to make better decisions to widen the growth prospects of a business.
Opt for companies with a strong economic moat

Market leaders are set apart by the strong competitive advantage (economic moat) that they hold, over their competitors. It may be their level of product innovation, acquired monopoly in product or service demand, a sector pioneer's head start, or any other advantage that keeps them sufficiently ahead of all competition. Buffett has always believed in investing such companies that have a strong protective moat.
Look for high return on equity

A parameter that is closely monitored by the master investor is the return on equity (ROE), quantified as Net Income/Shareholder's Equity. It quantifies the net income earned by the company, for a small percentage of shareholder's equity. It measures the benefit generated for the invested shareholder money. A consistently high ROE for more than 5 years, marks a company to be a safe bet for investing.
Pick businesses with high and stable profit margins

Another parameter that's part of the Buffett scanner is the profit margin (Net Income/Net Sales x 100). To qualify for investment, the profit margin needs to be consistently high and growing for the past 5 years.
Focus on a few good bets

Wide diversification is only required when investors do not understand what they are doing. ―Warren Buffett

At the other extreme of non-diversification is over-diversification. Buffett believes in focusing on a few good bets for the long term and doesn't believe in spreading himself too thin or over-diversifying. By focusing on a chosen few stocks that have passed his extremely detailed scanning test, he increases his holding in them over a period of time to bolster his bet. This also lets him invest in a high volume of shares of a company, in a single go, acquiring a significant, and at times, controlling stake in companies. The idea is to go all in and back a few chosen bets, after detailed analysis. Of course, this strategy requires a lot of conviction in your choices, and at times, the willingness to be a contrarian, when conventional market wisdom thinks otherwise.
Focus on parameters identifying undervalued investments

There are many other parameters that are a part of the scanner employed by the master investor. These include: Low Price-to-Book Ratio: This ratio (= Stock Price/Total Assets - Intangible Assets - Liabilities) allows you to screen stocks that are trading below their book value, a.k.a. undervalued stocks, which are bound to appreciate to their true value, in the future. Low Price-Earnings Ratio: This important ratio (= Market value per share/Earnings per share) can only be used to compare companies within the same sector, to separate those with high earnings, trading at relatively low prices. This parameter should never form the only screening criteria, as not all low P/E ratios indicate undervalued high-performance companies. Low Price-to-Sales Ratio: This parameter (= Stock price/sales per share) can be indicative of an undervalued stock. It determines the value of each dollar earned in sales per share, for a company. Again, this indicator shouldn't be used in isolation, but only as part of a broad analysis of the company's financial fundamentals. High Dividend Yield: The yield (= Annual dividends per share/Price per share) can separate out companies that pay out high dividends for every investor dollar put in. In totality, these price multiples can together identify undervalued stocks, a rare breed that a value investor like Buffett prefers buying, as they have a high probability of appreciation compared to other stocks.
Be patient, hold on, it gets better

Our favorite holding period is forever. ―Warren Buffett

Lastly, the core principle of Buffetology―once you find a good thing after careful analysis, hold on to it, as with time, it only gets better. True investors are in it for the long run. Speculative day trading not only incurs high transaction costs and taxes, but also doesn't add up to substantial profit, compared to a well-thought out long-term bet. Think like the owners of a business when buying a stock, and your approach to the whole process is bound to change.
Timeless Wisdom from the Oracle of Omaha

Lastly, some timeless quotes to live by, from the Oracle of Omaha, that should be pinned on every investor's work desk.

Risk comes from not knowing what you're doing.

Never depend on a single income. Make investments to create a second source.

If you buy things you do not need, soon you will have to sell things you need.

You only have to do a very few things right in your life so long as you don't do too many things wrong.

Do not save what is left after spending, spend what is left after saving.

Author: Omkar Phatak

INVEST IN A RIGHT

The saving does not always increased saving does not always correspond to increase of the way investment.

Author: ruve joy anoche

How To Invest Like A Pro

Ideally, investors try to buy a stock when the price has reached a support level (a level at which the price is as low as it will go) and sell the stock when it hits a resistance level (a level at which the price is as high as it will go). This is easier said than done. Most investors end up missing out on a continual rise by waiting for a stock to plummet first, or sell way to early by underestimating how high the price will go. In this article, we will focus on the two most popular strategies that you can use to invest without having to worry about market timing.

Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares of stock are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns overall, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low.

An example of DCA would be as follows: If I want to buy 1,200 shares of IBM stock using DCA, then I might decide to purchase 400 shares of IBM per month over the course of the next three months. Hypothetically, during month one, the price of IBM may be $105 per share, and then it might drop to $95 per share during month two, and then rise to $100 during month three. If I bought all 1,200 shares during month one, I would have cost me $105 per share. But, by spreading the purchase over a three month period, I managed to buy IBM at an average price of $100 per share.

The primary drawback of using DCA is that you may not be maximizing your overall return. If there is an indication that a certain stock is currently undervalued and might shoot up in price, you would actually make less money using DCA than if you had bought all the shares in the beginning before the price skyrocketed. So, it is not always a winning strategy to spread your purchases over a period of time.

Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment. With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, the investor contributes more money, while in periods of market climbs, the investor contributes less.

Here is an example of DVA: I want to invest in Yahoo using DVA. For the sake of argument, we will say that Yahoo is currently $10 per share. I determine that the value of the amount I am going to invest over the course of 1 year will rise, on average, $1,000 each quarter as I make additional investments.

If I use DVA, I invest $1,000 to start. If, at the end of the first quarter, the share price has risen to $15 per share, that means that the value of my investment is now $1,500, which means I will only have to invest $500 at the start of the second quarter in order to bring the total amount of my investment for the first and second quarter to $2,000. So, I am investing less as the stock price increases.

Author: Jim Pretin

Why Invest Yourself

An SMSF, or 'self managed super fund' is a situation in which a group of less than five people have pooled their resources together in order to make investments that can generate a good amount of profit. The way this works then is simple – the group of people will each agree to pay in a certain amount over a certain duration of time, and will then decide together how they want to invest their joint capital in order to try and increase their bounty. The idea for many is that self managed super funds provide a kind of pension, and many intend to draw the money out of their self managed super funds once they reach retirement. However at the same time an SMSF can be used for many other things, just like any bank savings can.

 The question is, why use self managed super funds, or why invest money yourself in a self directed way, when banks already exist to do all that for you with no effort on your part? There are several answers to this question. First of all, by using self managed super funds you are able to reduce your tax. The reason for this is that you get tax reductions on self managed super funds that don't apply to other savings accounts. In order to benefit form this reduction though, your SMSF needs to meet various criteria. This means you need to have five or less members, that none of the members must work for the other trustees, and that all members be trustees of the fund.

 Even without those tax reductions however, an SMSF is already a good move and a great way to invest money. One of the main reasons for this is simply that investing in an SMSF will allow you to make all the decisions regarding your investments and to decide how you want to invest.
This means that you have a lot more idea where your money is going and it means you can invest in such a way that you are supporting causes you believe in and/or acting on hunches and beliefs you have regarding what would be a good buy. Apart from anything else it's also a good learning experience and gives you a lot more idea how banks work and the economy in general.

Disadvantages of Investing in an Apartment

While investing in an apartment can have its own share of advantages, here are some possible demerits too that you should consider, before choosing to invest in one. The Brighter SideAccording to data from the National Council of Real Estate Investment Fiduciaries, for the period between 1984 to 2004, apartments provided a higher total return to investors, than the average for all other types of property.With the current boom in real estate, many people are keen to invest in an apartment. Apartment investment has numerous advantages, making it one of the most desired investments in the real estate market. A steady cash flow is perhaps the biggest draw. You receive a said amount of money from your tenants, and depending upon the number of flats in the apartment building, this can be a significantly big amount. What's more, investing in an apartment can also fetch you good profits when you sell it, due to a steady appreciation in its value. You can also save taxes when you sell an apartment and invest the money into acquiring another property.

However, every investment has two sides to it, and an apartment is no different. Let us have a look at the major drawbacks of renting out an apartment.

Demerits of Investing in an Apartment
1. Financing is Not Easy

It's important to know that apartments are sold as a whole, which means quite a big amount needs to be invested. Add to it the fact that, lenders and financial institutions are not very eager to sanction loans for commercial properties, and financing the property can prove to be difficult. Financial institutions offer mortgage loans (albeit at high interest rates) once you have paid at least 20% of the value as down payment. However, the monthly mortgage payments are quite high, and can dig a hole in your pocket if you don't find tenants sooner than later. To avoid such hassles, investors choose to invest in a group and share the expenses and liabilities.

2. Property Management

Most investors who invest in apartments find it difficult to manage the property. An apartment can have several issues, including maintenance issues, repairs, etc. So, investors hire a third party or a property manager to manage the administration and maintenance of the apartment. While tenants collectively bear the monthly maintenance cost for the apartment, unexpected expenses can come up once in a while, and then it is the owner who has to pay up. Also, if you're on a tight budget, the additional cost of hiring a property manager may discourage you from seeing it as a feasible option.
3. Dealing with Difficult Tenants

If you're lucky, you'll have clients who pay the rent on time, and are more than willing to follow the terms and conditions mentioned in the rental/lease agreement. However, almost every investor has had an experience with a difficult client in their careers. Add to it, the current economic condition, and you know what to expect! If the tenant fails to pay the rent for a particular month, it means additional expenditure from your end towards payment of mortgage. Also, eviction of the tenant can be troublesome in certain cases, when the tenant simply refuses to move out of your apartment. In such a scenario, the only option left before you is to take legal action against the tenant, and it can take some time for the court to pass a judgment.

4. It's Not a Liquid Investment

Author: Mukulika Mukherjee

Invest in a Recognized Web Design Company Online

If you wish to invest in services that would help maintain your website, consider a recognized web design company. The service should not only take care of its appearance alone, but should be designed to fit the needs of your customer, such as the user friendly feature. Know that your customer would not want to wait for more than a minute to have a page open up. He or she would not hesitate but move on to another site to look for a particular need. This is why it becomes crucial to invest in such services that would understand and take care of your need at every stage.

It is important for one to consider the designer�s qualifications and experience, you do not want to be dealing with amateurs. You could ask for samples from the service, a good web design company would ideally offer you one. If you, however, come across one that does not agree to this condition, you should avoid investing in the same. Such samples would give you an idea of what your site could look like. Your website would always represent your brand or firm, you can imagine what a bad site could do to your corporate reputation. Avoid getting yourself in such hassles!

Font size, layouts, background theme, descriptions and other such aspects play a key role when planning out a website. Article or write ups with small fonts are difficult to read. This would certainly have an impact on your reader. A good web design company would take care of this and have the right font placed on your site. Images form another crucial aspect to consider, content alone is never sufficient. This would mean that your website should always have sufficient images to support your content. Your potential customer would not want to look through content alone, images would help them understand your concept better.

The web forms an important platform today, it could be perceived as a meeting ground for people from all walks of life. This would mean that you are able to reach out to your target audience without paying much. All you have to do is invest in a reliable web design company, one that has worked with reputed firms in the past. You need to give your target audience a reason to invest in your services. Know that a good web design company in Mumbai, would make available customer care to help you out with a specific need. This could take the form of calls, live chat, etc.

Author: Dominick Quentin

Small Investment Options

Often, an individual finds himself/herself in possession of small capital or small volumes. Rather than spending such money rashly, choosing to make small investments which have pocket-sized initial investment, is a better alternative. A person with the intention of investing has to consider a few things or decide his objective of investing. According to his/her needs he/she can invest long term, meaning for a longer period and lower risk, or invest small. The term 'small' conveys two things, small amount of money, or a small time period, which possibly extends for 12 months, or even a few years.

Features to Consider

Now, when it comes to the features and specifications of good, small and short-term investments, first thing that you need to consider is your convenience and your requirements. In the investment sector, there are countless different types and subtypes of investments. The 3 primary features that you need to know are: return over investment, recurring annual investment amount and lastly, time period or life span of the investment. Apart from those you can consider the following features: Invest and Forget: Now this is one useful feature of small investments. There are some investment options wherein all you need to do is put in the money that you want to invest and forget about it, then, upon its maturity or expiry of time period, one can enjoy the returns. Recurring Annual Investment: On the other hand, one can also choose, the investment option where in you would have to invest a specified amount every year into the option. Now the recurring annual investment is to be treated as a liability as you need to compulsorily invest the said amount into the option, in order to keep it alive and get back the appropriate returns. Return on Investment: The Return On Investment which is also known as ROI, this is the total amount that you would receive back. The ROI is calculated by subtracting the total amount of investment from the total amount received (total amount received - total amount invested). You may also calculate a percentage rate of return on investment to get better overview of the returns which you are going to receive in due course. Time Span: In some cases you would also need to consider the time span and total amount which you would have to keep invested into the option as a unit and compare it with the other investments. Apart from the aforementioned features you can also check some other features such as the provider of the investment option, your own future financial planning and its compatibility with the small investment option which you have chosen, etc.

List of Small Investment Options

The following is a quick list of some of the really good small investments which you can make as of today. A very quick overview of the significant pros and cons, and some of the really good features of the options have also been discussed.

1. Government Bonds and Other Treasury Bills
One of the best ways of stowing away small amounts of money for shorter time periods is into treasury bills and bond. Treasury, bills, notes, bonds, Treasury Inflation-Protected Securities (TIPS), I Savings, EE/E Savings are some of the best channels, most of which require about only $100 minimum investment. The advantage of such an investment option is that you can pay off the investment and wait till it matures, whereupon you can enjoy the returns. Some of these bonds and State government bonds and municipal bonds are some similar investments.

2. Common Stock, Corporate Bonds and Debentures
There are three types of contributions to the capital of a company. Common stock, corporate bonds and debentures are some of the common ones. All the three can be traded freely, and bonds and debentures also have a certain maturity or expiration dates upon which a certain accumulated interest is also paid off as a return on the same. The bonds and debentures are perfect investments, all you have to do is invest into them and wait for the returns. On the other hand, stocks or rather shares are the investments where you need to keep a tab on the prices of shares in which you have invested.

3. Systematic Investment Plans and Collective Investment Schemes
The Systematic Investment Plans (SIP) and Collective Investment Schemes (CIS) are professionally managed plans, such as mutual funds wherein you need to invest small sums of money periodically in the fund. In case of SIP, the amount that is to be invested, is not specified or mandatory, in fact for certain years, one may not even invest anything. The Collective Investment Schemes on the other hand have a certain mandatory investment is to be invested every year.

4. Roth IRA
Individual Retirement Accounts are probably the best accounts to invest your money into. The IRA can be opened in prominent banks and also in financial institutes and there is not mandatory minimum limit on the amount that can be invested into it. The IRA account is tax-free and it usually has an upper limit.

5. Bank Accounts
Banks offer countless deposit accounts where money can be deposited in any amounts, subject to upper limits and interest can be accrued on them. These accounts offer an interest rate which ranges from 5% to even 10% in some cases. These sort of accounts, are usually deposit-and-forget kind of accounts that offer returns upon maturity. On the other hand, there are also certain types of accounts wherein one needs to have a certain type of recurring payments throughout the time period of the account till maturity.

Author: Scholasticus K