Best of the Week
Most Popular
1.Gold And Silver Voodoo Analysis Price Forecasts - Austin_Galt
2.UK Saved From I.S. Threat But Scottish Independence Nightmare is Not Over! - Nadeem_Walayat
3.Silver Price At or Very Close to an Important Low - Clive_Maund
4.Gold And Silver - PetroDollar On Its Deathbed? PMs About To Rally? No - Michael_Noonan
5.Gold and Silver Bear Phase III Dead Ahead - Rambus_Chartology
6.Stock Market Major Selloff Looms - Zeal_LLC
7.Inflate or Die! When Leverage Fails and Market Hope Turns to Fear - Ty_Andros
8.Gold Price Very Close to an Important Low - Clive_Maund
9.Market Forecasts for Stocks, Gold, Silver, Commodities, Financials and Currencies - EWI
10.U.S. Aggression - Will Russia and China Hold Their Fire? - Paul_Craig_Roberts
Last 5 days
“Back Door” Method For The Government To Pay Down The Federal Debt Using Private Savings? - 1st Oct 14
Dow Stocks Index And The No Mercy Cycle - 1st Oct 14
Why China Thinks Gold is the Buy of the Century - 1st Oct 14
Forex Volatility Predicts Bottom in Gold and Silver? - 1st Oct 14
Stock Market Wil-e-Coyote Moment May Have Arrived - 1st Oct 14
Europe Teetering the Ddge of a "Japan-style" Deflation - 30th Sept 14
Economists Economic Atonement - 30th Sept 14
Everything You Need to Know About the Stock Market S&P Index Until Christmas - 30th Sept 14
Singapore Becoming Global Gold Hub - Launches Kilo Bar Contract And Gold ATMs - 30th Sept 14
Germany Fights on Two Fronts to Preserve the Eurozone - 30th Sept 14
Turn the Tables on the Gold and Silver Market Manipulators - 30th Sept 14
U.S. 2014 Election Business as Usual - 30th Sept 14
Gold - Time to Buy the Dip? - 30th Sept 14
Urging Investors to Stay Liquid for the Coming Gold Stocks Boom - 30th Sept 14
The Japanese Deflation Myth and the Yen’s Slump - 29th Sept 14
Epic Investor Optimism that Can Be Reversed Only by a Huge Stocks Bear Market - 29th Sept 14
Russia’s Gokhran Buying Gold Bullion In 2014 and Will Buy Palladium In 2015 - 29th Sept 14
The End of Monetary Policy - 29th Sept 14
Here's What Rising Interest Rates Really Do to Your Shares - 29th Sept 14
Is a Credible Stock Market Top Forming? - 29th Sept 14
Silver Price At or Very Close to an Important Low - 29th Sept 14
Gold Price Very Close to an Important Low - 29th Sept 14
Nihilism And The Unknown Future - 29th Sept 14
Stock Market S&P, NAS Change In Trend? None Apparent, But A Caveat - 29th Sept 14
UK Saved From I.S. Threat But Scottish Independence Nightmare is Not Over! - 29th Sept 14
U.S. Aggression - Will Russia and China Hold Their Fire? - 28th Sept 14
Currency Wars and the Death of the Euro - Audio - 28th Sept 14
Obscure Maritime Law Practically “Guarantees” Profits for These Energy Companies - 28th Sept 14
Stock Market Primary IV Underway? - 27th Sept 14
Darwin And The Climate Apocalypse - 27th Sept 14
The Global Middle Class and Copper Consumption, A Stop Spike Event - 27th Sept 14
Can Money Save The Climate? - 27th Sept 14
Gold And Silver - PetroDollar On Its Deathbed? PMs About To Rally? No - 27th Sept 14
Debt and Inflation Consquences of American Fear - 27th Sept 14
U.S. and Global Confidence are in Divergence - So Are Stock Markets - 27th Sept 14
Are U.S. Cars About to Crash? - 27th Sept 14
Why the U.S. Created and Armed ISIS From Libya to Syria - 27th Sept 14
Stock Market vs the Developing Bear Market for Liberal Democracy? - 26th Sept 14
Stock Market Major Selloff Looms - 26th Sept 14
How My Charts Uncovered Two Big Stocks That Are Soaring Like Small Caps - 26th Sept 14
What Cycles Reveal About Stock Market Crash - 26th Sept 14
Gold Not A Safe Haven On Terrorism, Middle East Bombing, Russia ... Yet - 26th Sept 14
Valuing Gold and Turkey Farming - 26th Sept 14
Gold $1200 Underpinned by Physical Demand - 26th Sept 14
Inflate or Die! When Leverage Fails and Market Hope Turns to Fear - 26th Sept 14
Market Forecasts for Stocks, Gold, Silver, Commodities, Financials and Currencies - 26th Sept 14
Gold and Silver Bear Phase III Dead Ahead - 26th Sept 14
The Home Depot Breach Boils Our Blood – and It Should - 26th Sept 14
Why the Pundits are Wrong About Crude Oil Prices - 26th Sept 14
Where’s the Economic Growth? - 26th Sept 14
Stock Market Future Bull - 25th Sept 14
The Specter of Global Debt Default is Once Again Rearing its Head - 25th Sept 14
All Major Market Analysis and Forecasts Investor Open House has Started! - 25th Sept 14
Federal Reserve Policies Cause Booms and Busts - 25th Sept 14
Currency Wars Deepen - Russia, Kazakhstan Buy Very Large 30 Tons Of Gold In August - 25th Sept 14
Strong U.S. Dollar Pressures Gold - 25th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Most Exciting Event in the History of Technical Analysis

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

© 2005-2014 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

Free Report - Financial Markets 2014