Investing in stocks the Warren Buffett way
Every art has its people; When the music is mentioned, we remember Beethoven and Mozart, and when we mention poetry we remember Al Mutanabi and Al Farazdaq, and when we mention investment, the first thing that comes to mind must be Warren Buffett, the giant billionaire and the great student of his professor Benjamin Graham, the greatest investor and financial expert in history. Buffett is a stand-alone school in the art of investing in stocks. He has laid solid foundations and rules for successful investment in stocks and applied them to his work meticulously, and was able to reach with his wealth a colossal number equivalent to the gross domestic product of a number of countries; His fortune amounts to more than $ 90 billion, knowing that he did not benefit from any inheritance, internal information, distinguished relationships, or even a job with a large salary! Buffett says that there is no secret to building wealth, and that any investor can achieve wealth if he follows the same principles and methods Buffett used.
Buffett is a global phenomenon in the world of investment. To the extent that one of the famous writers, Robert Hagstrom, wrote his famous book: (Investing in Stocks the Warren Buffett Method), he included the principles and techniques of investing in stocks according to the Warren Buffett method, which are indispensable for any investor or interested in this field. In order not to prolong you, let us browse this interesting book, of which about 1.5 million copies have been sold, and stop at some of its precious jewels of interest to those looking to invest their money in an effective way.
Warren Buffett’s Stock Investing Book
The book “Investing in Stocks the Warren Buffett Way” reviews Buffett’s investment strategy in building his wealth, summarizing it in four main rules: business rules, management rules, financial rules, and value investing rules. We will interpret these rules in some detail below.
The point here is that anyone who thinks about buying new shares should look at the matter as if he is buying a company and not just a security. This in turn makes it necessary for the investor to study the work and performance of the company, and to answer three important questions, namely: Is the nature of the company’s business understandable to him? Is the company reliable and there are indications of its viability in the long term? Is the company’s development potential in the future available? Which makes investing in its shares profitable in the long run?
Buffett believes that an investor’s understanding of how the company does business is important in making a successful investment decision. There is no sense in owning shares in a company or even owning the whole company if the investor is ignorant of the nature of its work and the activities on which it is based. Because this is nothing more than a doomed gamble. On the other hand, Buffett is not interested in suddenly rising stocks. Rather, what matters to him is the shares of those companies that are able to continue, develop and make profits over a long period of time.
As for the potential and prospects for the company’s development in the future, Buffett believes that it can be judged by the availability of three conditions, called the “trench”: the nature of its products and the extent to which the market needs them, and that these products do not have a near alternative that completely dispenses them, and that they are not subject to control. That is why the moat, or line of defense, widens as all these conditions are fulfilled in the company; Which makes investing in them encouraging and successful.
From Buffett’s point of view, it is not enough for an investor to know about the company whose shares he will buy. Rather, it is necessary to know the characteristics of its management and its directors. “I don’t want to invest in companies headed by managers that lack admirable qualities, regardless of the attractiveness of the company’s business or its profits,” Buffett says. And here he stresses the necessity of answering three questions about managers: Are they rational? Are they open and transparent with investors? Can the administration resist institutional and bureaucratic dictates? As for the rationality of the managers, it can be judged through decisions related to profits and the way they are distributed or invested in the development and expansion of the company’s business. The successful management is the one who knows how to reinvest the company’s profits to increase its value in the future.
As for the element of transparency and honesty, it becomes clear by answering three questions that usually revolve in the minds of investors: What is the approximate value of the company? What is the extent of its ability to fulfill its obligations? How well are its managers doing?
One of the important rules of management is also institutional dictates (to comply with strict regulations and instructions), which in Buffett’s view is a negative element that impedes the company. On the one hand, it leads to resistance to change, and it may lead to expansion and acquisitions for the purpose of displaying muscles in front of competitors, as well as subjection to institutional dictates may lead to imitation of competitors and award huge compensation to managers as a show – meaningless – of power.
In order for the investor to avoid falling into the trap of attractive – and sometimes manipulative – numbers that do not give a realistic picture of the company’s situation, he must see the profit rate within five years, and not be satisfied with the annual reports issued by the companies. Here, the investor must take into account a number of important financial principles, namely:
Focusing on business profits (shareholder equity) and not the market (dividend sale): Buffett believes that earnings per share do not reflect the quality of the company’s financial performance, but rather the return on shareholders’ equity, which is the profit resulting from the goods or services produced. And when this profit is achieved, it will be reflected in the earnings per share in the stock exchange, which is a real increase resulting from the improvement of the financial performance of the company, and not just a bubble that random speculation has caused its emergence.
Study owners’ profits, not cash flow: Some companies may report high numbers in their cash flow reports in order to raise their market value. The idea of deception is summarized around the amounts that must be deducted from the annual profits to modernize the machines and introduce improvements to maintain economic performance. Of course, these improvements can be postponed and deducted from the cash flow. This results in elevated numbers. Then the investor is fooled. Consequently, Buffett suggests using an owners’ earnings criterion rather than cash flow.
Investing in companies with high profit margin: Buffett tends to reduce expenses, and believes that they should not exceed a specific percentage for every dollar of income, and he follows the method of reducing the workforce to a minimum, and he was able to advance the Washington Post as a result of reducing production costs To 80% within five years.
– If the company holds profits to restart it, the market value of the share must increase by at least 1 dollar. Buffett believes that if the retention of profits to restart them does not result in an increase in the market value of the share by one dollar, then it is better to distribute the dividends to the shareholders than to restart them because there is no economic viability in this case.
Rules for investing in value
Value investing expresses the purchase of what its price is lower and its value has increased, its investment and the appropriate opportunity to sell it, after its price reaches what is equal to or more than its real value. This matter depends on two conditions: determining the value of the work, and buying when the work is offered at a price that carries a good discount from its value. In Buffett’s view, the business value is the sum of the net cash flows (owners ’profits) that are expected to be achieved during the life of the company, discounted by an appropriate percentage (10%), which is the proposed ratio to calculate the actual value of shares. Buffett bought Coca-Cola in 1988 according to this method and paid for it five times its book value, as he was sure that the real value of the company was greater than what he paid for buying its shares. This process has been Buffett’s greatest investment. On the one hand, Buffett believes that more important than all of the above is knowing the right moment to buy. When the price of shares in the market becomes less than their actual value, it is time to buy. But if it appears that the value of the work exceeds the value of the share, even by a small percentage, then one must refrain from buying, even if the price seems attractive.
Buffett’s Portfolio Management Strategy
Buffett stresses the importance of adopting a rational portfolio management strategy. While the majority of investors are accustomed to following two strategies in this regard, the first: “managing the investment portfolio linked to an index”, and the second: “effective management of the investment portfolio,” Buffett believes that these two strategies have very little chances of success. Because it is based on the theory of buy today everything that can be predicted with a profit without considering its nature, and this logic leads to failure, because it is impossible to predict the fate of the market in light of the complexities of the business world. Buffett proposes an alternative strategy, which he calls the “focused investment strategy.” This strategy is based on a practical principle stipulating that investments should be concentrated in strong companies, rather than focusing on investment diversification. In Buffett’s view, the number of companies in which we invest our money should be between 10 and 20 companies, as a maximum. In addition, Buffett advises that the invested funds should not be distributed evenly between companies. Rather, the greater part of it should be employed in the most prestigious companies, and the rest should be distributed relatively to other companies based on their strength and importance. Buffett adds to the foregoing, that the investment must follow a long-term plan with a duration of 5-10 years.
These were some quick glimpses and brief excerpts from the book (Investing in Stocks the Way of Warren Buffett) by Robert Hagstrom, through which we tried to identify some of the secrets of success for a giant global icon in the world of investment, money, business and wealth called “Warren Buffett”.
The art of money
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