Best of the Week
Most Popular
1.Stock Market Continues Defying Gravity, Dow New All Time High - Nadeem_Walayat
2.America Superpower 2016 - Ian Bremmer
3.The US Dollar and the Precious Metals Complex - Rambus_Chartology
4.UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - Nadeem_Walayat
5.The “Real Flash Crash” Will Scare You to Death - Shah Gilani
6.Gold Price Trend Forecast - Bob_Louka
7.UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt - Nadeem_Walayat
8.Gold Lifeboat to Global Economies “Titanic Problem” Warn HSBC - GoldCore
9.Will Interest Rates Ever Rise? - BATR
10.Who’s Killing the Stock Market? - Shah Gilani
Last 5 days
Investing’s Great Struggle - 29th May 15
How Rich Countries Get Rich - Freedom, Global Poverty, and the Failure of Foreign Aid - 29th May 15
Goldman Sachs Warns “Too Much Debt” Threatens World Economy - 29th May 15
Skunk Works Engineers Supersonic Profits - 29th May 15
Gold, Silver and US Dollar Strength - 29th May 15
This New Currency Could Wipe Out the Euro - 28th May 15
US Housing Market - Something Smells Fishy - 28th May 15
US Economy – Semi b2b Amps Up its Trend - 28th May 15
U.S. Fed Exported QE Travesty: Meet The BLICS Nations - 28th May 15
World War D—Deflation - Secular Bear Markets Analysis - 28th May 15
George Soros Warns of “Third World War” - 28th May 15
Why You Shouldn't Try to Invest Like Warren Buffett - 28th May 15
Stock Markets Buy and Hold is Back! - 28th May 15
We're Now Frighteningly Vulnerable to a Bond Market Crash - 28th May 15
Austerity, Economics and Religion - 28th May 15
National Holidays London and the Magic of Legoland UK Review - 27th May 15
Imminent Stocks Bear Market Signaled by Dow Theory ... - 27th May 15
Gold Price Has Bottomed – More Evidence - 27th May 15
Three Reasons You Shouldn’t Try to Invest Like Warren Buffett - 27th May 15
Gold Is “100% Guarantee from Legal and Political Risks” States Russian Central Bank - 27th May 15
Don't Drown in the Sea of Global Debt - 27th May 15
Three Reasons Why Carl Icahn Is Wrong About Apple Stock - 27th May 15
Crude Oil Price Stochastic Signals - 26th May 15
Why the Stock Market Will Crash - 26th May 15
GDP, Inflation, Employment Economic Statistics: It’s All a Lie - 26th May 15
Introduction to Peak Food - 26th May 15
Should We Dump the Euro? - 26th May 15
A Geopolitical Net Assessment of Europe - 26th May 15
Stock Market Top in Place? - 26th May 15
Best Cash ISA SBI 2.3% - 2.8 Year Fix, UK Interest Rates 2016 - 26th May 15
China Sets Up Gold Bullion Fund For Central Banks - 25th May 15
Is The Silver Trade Getting Crowded? - 25th May 15
Money Murder Mystery: Who Killed the Stock Market? - 25th May 15
Why Do We Celebrate Rising U.S. House Prices? - 24th May 15
Mario Draghi’s Slippery Downward Slope - 24th May 15
Gold : Truth is Stranger than Fiction - 24th May 15
Facebook Stock Price Forecast - 24th May 15
Make a Killing on the Coming Energy "Debt Bubble" - 24th May 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Biggest Debt Bomb in History

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

© 2005-2015 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

Biggest Debt Bomb in History