Best of the Week
Most Popular
1.What Happened to the Stock Market Crash Experts Were Predicting - Sol_Palha
2.London Housing Market Property Bubble Vulnerable To Crash - GoldCore
3.The Plan to Control ALL Your Money is Now at Advanced Stage
4.Why Gold Is Set For An Epic Rally This Spring - James Burgess
5.MR ROBOT NHS Cyber Attack Hack - Why Israel, NSA, CIA and GCHQ are Culpable - Nadeem_Walayat
6.Emmanuel Macron and Banking Elite Win French Presidential Election 2017 - Nadeem_Walayat
7.Trend Lines Met, Technical's are Set - US Dollar is Ready to Rally (Elliott Wave Analysis) - Enda_Glynn
8.The Student Debt Servitude Sham - Gordon_T_Long
9.Czar Trump Fires Comey, Terminates Deep State FBI, CIA Director Next? - Nadeem_Walayat
10.UK Local Elections 2017 - Labour Blood Bath, UKIP Death, Tory June 8th Landslide - Nadeem_Walayat
Last 7 days
BBC Newsnight Falls for FAKE POLLS, Opinion Pollsters Illusion for Mainstream Media to Sell - 27th May 17
UK Local Election Results Forecast for General Election 2017 - 26th May 17
Stock Market & Crude Oil Forecast! - 26th May 17
Opinion Pollsters UK General Election Seats Forecasts 2017 - 26th May 17
Bitcoin and AltCoins Crypto Price Correction - 26th May 17
Bearish Head and Shoulders in EURUSD? - 26th May 17
SELL US Stocks - Massive Market CRASH WARNING! - 26th May 17
EURGBP: A Picture of Elliott Wave Precision - 26th May 17
Credit Downgrades May Prompt Stock Market Capital Shift - 26th May 17
Rosenstein and Mueller: the Regime Change Tag-Team - 25th May 17
Stock Market Top - Are We There Yet? - 25th May 17
Should I Invest My Fortune in Gold? Inaugural Lecture by Dr Brian Lucey - 25th May 17
USD/CAD Continues Decline - 25th May 17
Bitcoin Price Goes Loco! Surges through $2,500 Despite Unclear Fork Issues - 25th May 17
The US-Saudi Arms Deal - Sordid Saudi Signals - 25th May 17
The No.1 Commodity Play In The World Today - 24th May 17
Marks and Spencer Profits Collapse, Latest Retailer Hit by Brexit Inflation Tsunami 2017 - 24th May 17
Why Online Trading Platforms Are Useful for Everyone - 24th May 17
The Stock Market Will Tank Hard - 24th May 17
It’s Better to Buy Gold & Silver When It DOESN’T Feel Good - 24th May 17
Global Warming - Saving Us From Us - 24th May 17
Stock Market Forecast for Next 3 Months - Video - 23rd May 17
Shale Oil & Gas Production Costs Spiral Higher As Monstrous Decline Rates Eat Into Cash Flows - 23rd May 17
The Only Metal Trump Wants More Than Gold - 23rd May 17
America's Southern Heritage is a Threat to the Deep State - 23rd May 17
Manchester Bombing - ISIS Islamic Terrorist Attack Attempt to Influence BrExit Election - 23rd May 17
What an America First Trade Policy Could Mean for the US Dollar - 22nd May 17
Gold and Sillver Markets - Silver Price Sharp Selloff - 22nd May - 22nd May 17
Stock Market Volatile C-Wave - 22nd May 17
Stock Market Trend Forecast and Fear Trading - 22nd May 17
US Dollar Cycle : Deep Dive - 21st May 17
Bitcoin Breaks the $2,000 Mark as Cryptocurrencies Continue to Explode Higher - 21st May 17
Stocks, Commodities and Gold Multi-Market Status - 21st May 17
Stock Market Day Trading Strategies and Brief 20th May 2017 - 21st May 17
DOW Needs to Rally Big or Correction is Next - 20th May 17
EURUSD reaches DO or DIE moment! - 20th May 17
How to Get FREE Walkers Crisps Multi-packs! £5 to £28k Pay Packet Promo - 20th May 17
UK BrExit General Election 2017 - Will Opinion Pollsters Finally Get it Right? - 19th May 17
Gold Mining Junior Stocks GDXJ 2017 Fundamentals - 19th May 17
If China Can Fund Infrastructure With Its Own Credit, So Can We - 19th May 17
Evidence That Stocks are More Overvalued than Ever - 19th May 17
Obamacare May Become Zombiecare In 2018 - 19th May 17
The End of Reflation? Implications for Gold - 19th May 17
Gold and Silver Trading Alert: New Important Technical Development - 19th May 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

How to Invest Like the Market Oracle of Omaha, Warren Buffetts Rules

InvestorEducation / Learning to Invest May 01, 2012 - 07:01 AM GMT

By: Money_Morning

InvestorEducation

Best Financial Markets Analysis ArticlePatrick Vail writes: For months, the Obama administration has been using Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman and CEO Warren Buffett's considerable name recognition to try to change how America's top earners are taxed.

The fate of the so-called "Buffett Rule," which would apply a minimum tax of 30% to individuals making more than $1 million a year, still has yet to be determined. Chalk it up to politics as usual.


There is, however, a list of other Buffett Rules that are far more useful to investors.

They're the tricks of the trade that have made Warren Buffett the most successful living investor, and one of the richest men in the world.

After all, the Oracle of Omaha hasn't earned his nickname by mistake. To many, it seems the billionaire has a sixth sense when it comes to investing, a supernatural ability to divine the good investments from bad.

But while his ability may be uncanny, there's really no magic at work. What Buffett has above all else is discipline. His philosophy is based on patience.

As a value investor, Buffett's goal is to identify companies the market has undervalued or companies that are trading cheaply compared to their intrinsic value.

Once he finds them, he buys them and holds on to them for the long term while their value steadily increases over decades.

Warren Buffett's Rules for Successful Investments
Beyond those simple tenets, there are a few rules - those other Buffett Rules - that guide Buffett's conscience as he makes investment decisions.

Rule No. 1: Consistent Performance
Warren Buffett won't even consider a company unless it's been around for 10 years or more and can demonstrate a record of consistent performance.

One metric Buffett uses to track performance is return on equity (ROE). ROE measures the rate of return on the money invested by stockholders and retained by the company in profitable times, demonstrating a company's ability to generate profits from shareholders' equity (net assets). In other words, ROE shows how well a company uses investment funds to generate growth.

Last November, after years of eschewing technology stocks, Buffett sank $10.7 billion into International Business Machines Corp. (NYSE: IBM). A quick look at IBM's ROE tells much of the story. With a stellar 73.40% ROE, IBM is in the 98th percentile overall, and the single-best performer in its industry.

The Coca-Cola Co. (NYSE: KO), another of Buffett's holdings (he owns 200 million shares), has a less astronomical - yet still very impressive - ROE of 26.18%

Rule No. 2: High Income
Buffett has said that one of the best ways to stay wealthy is to invest in companies with a stable business and a high dividend. As a buy-and-hold investor, Buffett minimizes his tax liability by remaining in his positions for years, even decades.

Dividend stocks help to balance out a growth-oriented portfolio, which is what you'll have if you're following Buffett's footsteps. Your portfolio will be more diverse, and you'll be insulated a bit from market volatility.

In Buffett's portfolio, you'll find high-yield stocks like General Electric Co. (NYSE: GE), which yields 3.60%, and GlaxoSmithKline plc (NYSE: GSK), which pulls in 5.80%. You'll also find ConocoPhillips (NYSE: COP), in which Buffett has $2.1 billion invested. COP has a market cap of $96.8 billion and is yielding 3.60%.

The important thing to look for is dividend growth. As the company grows and the stock price goes up, does the dividend rise? Look for companies that have increased their dividend each of the last several years.

Rule No. 3: Manageable Long-Term Debt
Warren Buffett, as a general rule, doesn't like debt -- especially long-term debt. The debt-to-equity (D/E) ratio tells investors what proportion of equity and debt the company is using to finance its assets. A high D/E ratio can lead to greater volatility in a company's earnings. But what's really important is how much debt a company has compared to its competition in the same industry. All of Buffett's positions take a prudent approach to debt.

Take, for example Johnson & Johnson (NYSE: JNJ). Its D/E ratio currently sits at 0.3439, which is about average. But over the last five years, it's 0.2648, a bit better than average.

Intel Corp. (Nasdaq: INTC), another of Buffett's newer holdings, has averaged a D/E of 0.064 over the past five years. Visa Inc. (NYSE: V), in which Buffett has a nearly $100 million stake, has had a microscopic D/E ratio of 0.030 over that same period.

While he only speaks about debt in a general sense, it is believed that Buffett is most concerned with a company's ability to repay its debts. To figure this out, simply divide the long-term debt by profit. In the case of JNJ, it would take just a bit over three months for it to pay off its long-term debt, which is very manageable.

Rule No. 4: The "Economic Moat"
High profit margins relative to a company's closest competition are extremely important. This creates what is known as an "economic moat," a term coined by Buffett to describe a company's competitive advantage. Economic moats help defend against competitors that try to gain market share by imitating successful products. In short, an industry leader itself can be an imposing barrier to entry, and those are companies Buffett thinks have value.

Look at Procter & Gamble (NYSE: PG), owner of brands like Tide, Pampers, Oral-B, Gillette, and Duracel, to name just a few. PG's long-term strategy is to compete only in markets where it is first or second in market share. That leadership position allows the company to comfortably raise prices when its costs go up, and its many popular brands represent pretty high barriers to entry in most of the markets in which they compete.

Rule No. 5: Sound Management
Buffett has said that investors should buy stocks as though they are buying the company. Buying stocks, therefore, is a vote of confidence in how that company is managed.

Evidence of good management, in Buffett's view, is when management's actions deliberately benefit shareholders. This includes things like share buybacks, wise use of retained earnings (transforming earnings into market value), and focusing on the core business. In general, it's when management acts as a good shepherd for its shareholders' money.

Berkshire's holdings read like a who's who of well-managed companies: Kraft Foods Inc. (NYSE: KFT), Wal-Mart Stores Inc. (NYSE: WMT), M&T Bank Corp. (NYSE: MTB), Sanofi SA (NYSE: SNY), and U.S. Bancorp (NYSE: USB), to name a few.

So there's no magic or extraordinary clairvoyance illuminating Buffett's great investments. There's not even a complicated trading strategy at work.

It is just a simple, principled approach to investing that's made Warren Buffett a billionaire several times over.

Source :http://moneymorning.com/2012/05/01/warren-buffett-stocks-how-to-invest-like-the-oracle-of-omaha/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife