Strategic Direction: How to Pick Stocks Like Warren Buffett
The net results of Warren’s investments has placed him by Forbes as the richest or one of the richest billionaires (depending on the year) in the world. In his book How to Pick Stocks Like Warren Buffett, Timothy Vick provides easy to understand insights on the “value investing” model that Buffett uses. Below are highlights from his book.
- As a child, Warren started reading books about investing
- When his was 11 years old, he began trading stocks
- While in college, Warren was strongly influenced by Benjamin Graham – the author of The Intelligent Investor
Determine the Intrinsic Value of a Firm
Understanding the intrinsic value of a company is critical to long-term investing success. Buffett trusts that overtime the price of a asset will find its intrinsic value. He believes there is a perfect correlation between price and value.
The key is to understand the intrinsic value of a firm before investing in their stocks. The intrinsic value isn’t easy to calculate. It is the combined tangible and intangible value of the company. This value may not be the same as the market value. There are different ways used to determine a company’s intrinsic value.
How To Calculate The Intrinsic Value of a Stock
Wouldn’t it be great if, by plugging some numbers into a formula, you could determine whether or not you should buy a stock? Unfortunately determining the intrinsic value of a business not quite that easy.
There are a number of calculations that you can use to estimate the approximate value of a stock. One popular method is to calculate a stock’s “intrinsic value.” Using this type of valuation method, you calculate a stock’s price based on the expected value of future earnings per share and dividends. Learn more about calculating a stock's intrinsic value.
An important question is when should you use the intrinsic value method to calculate the value of stock prices? Once you’ve done your research and decided that you like a company and you think that the company is positioned favorably for your investment timeframe, then its time to decide if you should buy the stock now or if you should wait a little while for a better price. Warren Buffett says: “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
- Superior returns can be gained by buying undervalued securities
- Warren focused on buying significant stocks in an undervalued companies and then work to position and sell the company for more than what he paid
Look for Firms with Simple Business Models
Buffett seeks profitable businesses with simple business models.
Determine the Competitive Position of a Firm
Look for relatively unique businesses with a good position in its market.
Don’t Follow the Crowd
The author states that you “are better off if you ignore Wall Street performance predictions…” To be a successful pay attention to the value of an asset, which is based on its earnings.
Leverage Your Money
- Warren purchased significant positions in cash-generating firms
- He increased cash flow and used the proceeds to invest in stocks and bonds
- In particular, he invested in insurance companies