Warren Buffet is always known for using his investment principles to generate high returns on his investment. He is known to be one of the most successful investors because he has demonstrated that he is excellent at what he does. What are his investment strategies that keep bringing him lots of returns? Firstly, let us begin by understanding the term “investment strategy”. This term refers to a body of principles or rules that has been set aside to help a person or group of people achieve their investment goals.
As a successful investor, Warren Buffet understood that he needed to design principles that would guide him to achieve his investment goals. This plan is designed so that when he is faced with risk or uncertainty, he can always refer to it. As an investor, you need a proven system to help you build your portfolio. Having a set of principles does not mean that you can not change them from time to time. Your strategy should be open to a particular level of flexibility. Depending on the situation you find yourself in, you should evaluate your strategy and choose what is best.
However, today we shall consider Warren Buffet’s investing style that has always granted him success. The question “how does he do it” will bring us to another term, “value investing”.
What is value investing?
Value investing is a term used to describe a strategy that investors use to generate high returns. This strategy involves choosing stocks that are less than their actual (intrinsic) value. A successful investor uses this strategy to observe the market and invest in stock below its true value. The stock market is highly volatile. When the price of a stock is low and others are selling, the great investors use the opportunity to analyse the market and invest more in stocks they believe in.
Among these value investors we have David Dodd, Warren Buffet, Charlie Munger, Christopher Browne, and many others. They use this strategy because they are long term investors, and they believe in their vision. As a young investor, you need this attitude; when things are not going well in the stock market, instead of always thinking of rushing to sell what you have, have you ever considered investing in “undervalued stocks”?
The stock market goes through a lot of fluctuation, and it is your responsibility to hold yourself from making a hasty move. Investors have to act like an investigator to detect what is happening in the market. This can lead you to buy a stock at a discounted price, and it helps you stay informed. When a stock is “undervalued”, it sells for a price below its natural value. If you want to invest in such a company stock, you must research. How do you go about this? You should evaluate the situation of the company. Take a detailed look at their financial records over a long period. Check their profit generation statement, and ensure they are not into a huge debt that can make you lose your investment.
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Why value investing?
Value investing is simply the strategy to buy low and sell high. It is straightforward as it sounds, but it takes a lot of hard work. Aside from Warren Buffet, Benjamin Graham is an excellent investor widely acknowledged. He is a significant figure known for value investing; he is the author of “the intelligent investor”.
Undoubtedly, value investing is an intelligent decision to make as an investor. This brings us to what to do before investing when company stock is low.
Understanding the company
Since investment is the best way to grow one’s wealth, it can also be a means to lose money quickly. In order to avoid mistakes, you have to understand the business you’re investing in. Please don’t proceed to invest in a company that you don’t know how they generate its profit. Don’t invest in company stock because your friend asked you to. You should not invest based on what you see on people’s social media pages alone without doing your investigation.
Don’t hesitate to review the company’s business model and look out for its cash flow statement. You need to know about the product and services that they offer. How do they provide their services to people? You can also check out the industry they are competing with. This brings us to the point below.
Look out for a competitive advantage
All the companies that you can think of have those that they are competing with. However, when a company has a strong economic value, it has nothing to fear. Examples of such companies includes; Amazon, Facebook, and Coca-Cola, to mention a few. Having a solid economic “MOAT” gives them a competitive advantage over others in the same line of business. It is difficult for such brands to go out of business. Even if there should be a thousand brands producing the same product as them, there will be nothing to fear.
Analyse the company’s debt-equity ratio
When making plans to invest, you should check the company’s debt-equity ratio. This will help you understand what the company has and what belongs to its shareholders. Any company existing has a debt-equity balance. When doing your research, ensure the company’s debt is not more than what it owns.
Investigate the net profit margin
Net profit margin indicates how a company can change or convert its revenues into profit. As an investor, you need to know the revenue that remains after all the company’s expenses must have been deducted. To do this, you need to get information from the company, and such information should include a statement of gross profit margin.
Finally, there is nothing wrong with value investing, but don’t forget to do it strategically. Don’t purchase without being sure if your decision is right or wrong. And be sure that you are in line with your investment goals.
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Recommended books for further reading:
- Shares Made Simple: A beginner’s guide to the stock market
- Smarter Investing: Simpler Decisions for Better Results
- How to Make Money in Stocks: A Winning System In Good Times And Bad
- A Beginner’s Guide to the Stock Market: Everything You Need to Start Making Money Today
- The Barefoot Investor: The Only Money Guide You’ll Ever Need
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- Passive income
- Silver & Gold coins
- Interactive Brokers
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