How does Warren Buffett's investment process like?
- Philosophy of Warren Buffett investment house
- Warren Buffett's investment process
You may not like Warren Buffett, but his great success will make anyone admire / ph: pinterest
You already know that there was only a $ 10,000 investment in Berkshire Hathaway Company in 1965, and by 2005 Warren Buffett had caused that money to grow to $ 30 million. Meanwhile, another $ 10,000 invested in the S&P 500 Company brought him about $ 500,000.
You may not like Warren Buffett, but his great success will make anyone admire. Buffett has become a legend in the history of the financial industry and many people have followed him in search of that great success. So how does Warren Buffett's investment process like?
Philosophy of Warren Buffett investment house
In financial operations, each investment house has its own way of thinking, there are philosophies that guide their investment decisions. Buffet has studied value investing at Bejamin Graham School. Value investment house is often looking for securities with a price much lower than their actual value. Calculating the intrinsic value of a security is not an easy task because it requires a cool head and sophistication because there are no standards in the world to calculate this number. Most assessments of intrinsic value are based on analysis of a firm's underlying metrics. Like housewives haggling when shopping, value-seeking investment house try to find cheap, truly valuable items, but most shoppers miss out. Buffett takes this investing approach, but he takes it on a different level.
Many value investment house do not believe in efficient market theory, but they do believe that the market will fill their pockets because over time undervalued stocks rise to their true value. them. But Buffett doesn't think so. He doesn't care about the complex supply-demand relationship on the stock market, and really doesn't care what is going on in the market. He chose to buy stocks simply based on the potential of the company. Holding these shares for Buffett is like playing a game, he not only wants to increase his investment capital but also wants to own companies with high profitability. When investing in a company, Buffett does not care if the market will later realize the true value of the business, instead he only cares about its profitability as a reality can conduct business activities.
Warren Buffett's investment process
You may not like Warren Buffett, but his great success will make anyone admire / ph: pinterest
So how does Buffett find low-priced stocks and how does he evaluate the relationship between stock price and stock quality? Here's how Buffett conducts investment analysis. If you really want to be a successful investment house, keep in mind not only the factors that Buffett analyzes, but also what he looks for.
When deciding to invest in a company first, Buffett always considers whether the company has long-term performance. ROE is one of the first interested indexes, the comparison of this ratio with other businesses in the industry will bring useful information. Of course, just analyzing this number in one year is never enough, to be like Buffett, you have to at least look at this index for 10 years to see the entire performance of the company.
ROE is one of the first interested indexes, the comparison of this ratio with other businesses in the industry will bring useful information.
Second, see if the company is restricting excessive borrowing. The debt-to-equity ratio is another important metric that Buffett is scrutinizing about. He is always looking for companies with low debt levels, so the shareholders' equity will increase revenue, not borrowed money. If this ratio is high, it means that the company is using money from borrowing rather than using capital from shareholders to maintain operations. Relatively high debt borrowing relative to equity can lead to income instability and high cost of borrowing (interest).
Third, profit margins are a factor to think about. The profitability of a company depends not only on its profit margin, but also on the company's continued rate of growth. To get reliable information about a company's profitability, consider this index for at least 5 years. High margins mean that the company is doing well, but the increase in profit margin (or profit margin) is a sign that company management is very effective, especially in cost management.
Fourth, consider how long the company has been equitized. Buffett typically only looks at holding companies that have been in business for at least 10 years. As a result, most tech companies that issue IPOs in the past decade are not in Buffett's sights (not to mention that Buffett only invests in the companies he owns. Well informed, and he admitted that I don't understand much about how most of today's technology companies work.) However, Buffett's standards still make sense: investing in value means finding companies that have been tested over time, but prices have yet to represent its true value.
Remember, never underestimate a company's past achievements, which is very useful information to predict the ability to increase profitability for shareholders. But let's not forget that a company's past performance does not completely guarantee that the company will perform well in the future, so it is the value of the investment house's job to determine whether in the future the company can operate easily, but Buffett is a genius in determining the ability of a company to grow.
Past achievements should never be underestimated
Fifth, consider how the company's product structure is, whether there is only one product produced? You might think this is a very ordinary question. For Buffett, however, this question is extremely important. Buffett often overlooks companies where their products don't stand out from rival companies and companies with a single product category. The trait that Buffett calls the firm's self-defense armor, in other words, is his comparative advantage. The stronger the advantage, the more likely a company will prevail in the market.
The last thing the world financial legend cares about, and perhaps your own, if you want to be a real investment house, is whether the stock will sell at price. lower than its actual value by 25% or not.
Finding a company that satisfies these criteria is one thing, but determining whether it is undervalued or not is another, this is a complicated difficult job. for value investment house, and also Warren Buffett's most important skill. To test this final criterion, the investment house needs to calculate the intrinsic value of a company by analyzing fundamental data, including net profit, total revenue, assets? If a company has an intrinsic value that is always greater than its liquidation price, how much would it be worth if you went bankrupt today and went up for sale. The liquidation of a company will not include intangible assets such as brand equity, an asset that does not appear on the financial statements but is very important and valuable.
For Buffett, when he calculates the intrinsic value of a business, he often compares it to its current market capitalization. If the intrinsic value of a business is at least 1.25 times higher than its market capitalization, Buffett will list the company on his sound investment list. It sounds simple, but in reality, Buffett's great success is due to his incomparable giftedness in calculating intrinsic value. Even if we know the above criteria of Buffett, no one can know, how he was able to calculate so accurately.
Buffett's investing style is similar to that of those who love to haggle. That style was in his blood and it reflected in his daily life. In 2004, Buffett was named the second richest person in the world by Forbes Magazine, with a total net worth of about $ 40 billion. However, Buffett does not live in big mansions, nor does he have a collection of cars or use Limousines to work. Maybe many people do not like Buffett, but the investment house has become a monument in the financial industry and made the world tilt to admire his talent.
How does Warren Buffett\'s investment process like?
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