Updated: Mar 12, 2021
With the recent GameStop share frenzy and the substantial rising value of Tesla coupled with ease of access to the stock market for retail investors, Stock trading and investing has become more popular and accessible than ever before in our history. UpTicker reviews How to Pick Stocks like Warren Buffett by Timothy Vic. This blog gives a comprehensive overview on how one of the most successful investors of all time chooses which stocks to invest in.
Timothy Vic is a big advocate for value investing in his book he uses Warren Buffett as the basis for his easily digestible lessons on value investing
Background & Core principals:
The strategy or value investing means investors invest in companies that are currently on divided by the market.
Warren Buffett has amassed $30b when this book was written and $86b as of date of writing through carefully investing using mathematics to guide his decisions. Warren Buffett set up Berkshire Hathaway over 30 years ago. One of Buffett’s strategies is to buy existing businesses and use their cash flow to buy other cash rich companies. Buffet looks for businesses which are profitable and have a simple business model.
Buffet looks for the right combination of value and price before investing. Compound interest contributes to building wealth. In the long run price and value can align. The biggest mistake investors make is copying others. Pay attention to an assets value based on its earnings.
Buffett considers himself to be a capital allocator who seeks cheap money from the financial world and uses it to buy cash generating companies and then to compound that firm's money at an annual rate which is 20-30%. The proceeds go to his investment firm Berkshire Hathaway. Buffett's career has been based on exploiting financial inefficiencies time and time again and has been compounding his income.
He (Buffet) was inspired by a book he borrowed from the Omaha public library at age seven, One Thousand Ways to Make $1000.
Buffet worked for his fathers brokerage in Omaha Nebraska where he would file stocks and bonds in post stock quotes. By the age of 11 Buffett bought his first stock. Buffet then went to Wharton School of business and at that time he will strongly influenced by Benjamin Graham who wrote the book The intelligent investor buffet eventually graduated with a Masters degree in economics. Graham's ethos was stocks should reflect a company’s real worth and purchasing it while it is undervalued can deliver superior returns. This ethos became Buffet’s guide.
In 1945, as a high school sophomore, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in three different barber shops across Omaha. They sold the business later in the year for $1,200 to a war veteran.
Buffet saved $140,000 and by adding $100,000 from friends and family he formed his first investment enterprise called Buffett partnerships. As his investments prove successful more investors contributed money. He established a reputation for buying significant portions in the valued companies which would buy him board seats and would result in buffet correcting the companies financial positions and assisting management in selling the company for more than he paid. In 15 years Buffet sold his partnership and earned in the region of $20-$25 million.
Buffet then began buying shares in a textile mill in Newbedford Massachusetts called Berkshire Hathaway and took control within 5 years and became Chairman in 9. Through Berkshire Hathaway he acquired more companies and eventually became the world's largest investment for. Buffet reinvested profits for 30 years and built a huge fortune
Take advantage of cash flow from existing businesses held by the holding company and cutting costs where possible
Use cash flow to buy other companies
Only by cash rich companies which are cheap enough to realise higher returns on the original investment
Use the cash from acquire companies to invest in stocks and bonds
Add insurance companies to your portfolio as conduits for buying stocks and bonds
Use insurers to provide a low-cost float to increase available investment money
Warrens secret of stock selection
Buffets net value increased due to the success of his acquisitions and stock investments. Buffet lists the following points to consider when purchasing stocks
Look for a profitable business with a simple business model
Is it generating high cash flow
Being relatively unique with a good position in the market
Has stable management
The shares sell at a price that makes mathematical and economic sense
Maximise returns through mathematics
If you choose good companies at reasonable prices you will generally see stock prices increase. If you have chosen your stocks well the power of compounding means that your net worth will grow by increasingly greater amounts because the longer your money compounds the larger it will be annual rate of return access as a lever to magnify or minimise your wealth. Buffet says to avoid any stocks that are rising much faster than their growth in the value of the company. When investors pay too much for stock they’re behaving “irrationally” since eventually prices will realign with value.
The biggest mistake investors can make is buying or selling stocks based on the decisions and actions of others for example the office says that you are better off ignoring Wall Street performance predictions. Extrapolating prices is dangerous. Simply put, ignore market scripts and pay attention to the value of the asset which is based on its earnings over the long-term know as it can go faster than its earnings
Boost your returns like Buffet
Look for value and let your money compound. Consider the strategies below to boost your returns
Buy low and sell high. This is common sense and goes without saying by low and sell high means buying undervalued stocks
Diversification according to the author and Buffett undermines your ability to gain higher returns. The more stocks you are in the more difficult it is to track your portfolio
Keep an eye on expenses. Watch out for stock broker commissions and other fees. With new platforms these fees have been reduced substantially. Please be wary of which platform you use to buy stocks and shares. Robin Hood recently got into a massive scandal by preventing the purchase of games stop shares and of the digital/online brokers may have a very small revenue which means that it may not be safe to invest through them
Reinvesting your dividends can increase your returns
Keep good records and keep evaluating what you buy and what you do not buy. This includes your personal expenses and unnecessary luxury items. Money you spend needlessly now can be turned into a much larger amount if invested properly
Maximise your gains with a buy and hold strategy. Given all the fake scammers on YouTube and I you’re aware quick returns and successes are promised irresponsibly the most sensible strategy is to buy and hold as opposed to buy and sell over a very short period of time for example daytrading the longer you hold a stop the more chance you have to make money. Frequent traders are less likely to earn as much especially given the commissions they have to
Avoid complicated systems such as market forecasts. Overpredicting can result in a chain link of errors where one faulty forecast leads to another to another
Don’t buy stocks because you are casual because the company is undervalued. Buffet suggests only buying the stocks when they fall to attractive price
Picking stock like Warren Buffett
By analysing companies like Warren Buffett your goal should be to determine how much the business is actually worth. Focus on yearly net income that the business returns to you not only the share value. The market price is just a point of reference to determine if the company is valued correctly.
There is an argument which says that technology businesses should be valued differently as they are new and unique, however, Buffet disagrees and says ultimately a business should be judged on how well they can convert sales to earnings and the annual rate at which earnings increase. The company is worth the present value of its expected earnings. To estimate future earnings look initially to the past. Average past earnings can help you assess more realistically how well a company is likely to do.
Consider the level of risk within the business you are thinking about investing in. The riskier or more unpredictable accompanying earnings are the less you should pay on it. Once you determine a company‘s growth rate apply a discounting factor to compensate for the time value of your money.
Buffet detests rapid trading. To him it’s in money wasting activity that usually leads to inferior returns for investors.
Use information above as a good yardstick of growth. Buffet mentioned another good measurement of performance which is a company‘s growth in Persia book value. Most companies increase their book value by expanding profits and producing higher returns on assets and acquiring companies that have economic value. Buffet also uses the 15% roll which means that he looks for stocks that are able to deliver at least 15% returns year-on-year over a long period of time. Don’t expose yourself to high probability of loss.
There are no guarantees in investing however you can minimise your mistakes by buying for the long term