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Edited by DifuWu, Flickety

Warren Buffet made seven times his money last decade and the decade before and the decade before and the decade before (2401 times his original money). Warren Buffet said, "We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price."[1]


Using a formula to think like Warren Buffet might just provide you with the opportunity to increase your wealth through sensible investing.

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Edit Steps

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    Avoid technology companies if they cannot be easily understood nor the competition understood (that could put this company out of business). Any time that you're not able to decipher the purpose, mission or actions of a company, that should be a warning sign to you as an investor. Always prefer an investment in a company with clear aims and goals that are transparent to you.
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    Avoid companies in industries with low profit margins. Industries such as airlines, retail, entertainment, auto manufacture and other companies in overly competitive industries are not usually good long-term investments. A very competitive industry that has a low net profit margin (net income divided by sales) risks even less profit over time. Generally, net profit margins above 20 percent are excellent, and below 5 percent is bad.
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    Look for high quality companies with high percent net profits and high dividend yields. A company is high quality if it has high current ratio at least 1.5, has low debt to equity, has high interest coverage, is prominent in its industry, is large in size (annual sales at least $100 million and total assets at least $50 million), has at least some earnings in each of the past 10 years, and has paid at least some dividend in each of the the past 20 years. Net profits will grow the company and the stock price will follow. Dividends will grow Warren's portfolio. Warren learned this concept of buying high quality companies with good net profits from Philip Fisher and Charlie Munger.
    • Warren looks for the company with a "Moat" around it––that is, a company with some form of durable competitive advantage. Warren will avoid utilities, oil companies, transportation and retail stores unless the company has some form of evident monopoly or durable advantage.
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    Look for companies with low price-to-book. This concept Warren calls the "Margin of Safety" and he learned it from Benjamin Graham. It means that the value of the assets is not reflected in the stock price and you need to look at the company's balance sheet to discern this. Here is what to do:
    • Add the percent net profit to the percent dividend and divide it by the price-to-book. For example, Coca Cola is (23.82 + 2.81) / 5.19 = 5.1
      • If the ratio is less than 2, Warren believes the stock will fall and will sell.
      • If the ratio is in between 2 and 10, Warren will hold the stock if he already owns it.
      • If the ratio is over 10, the stock will likely double in price.
      • If the ratio is over 15, the stock will likely triple in price over the next few years.
      • If the ratio is over 20, the stock will likely quadruple in price over the next few years.
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    Only buy stocks that have ratios over 15 and will either triple or quadruple in price.
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    Save your money and invest it after market crashes. Warren learned from Benjamin Graham that 19 times during a 100 year period (every 5.3 years on the average) the stock market has some form of major crash due to economic peaks or war scares. This is when Warren will invest most of his money. Warren invested 20 billion dollars of cash that he was saving January 2009 after the Sub-prime meltdown of 2007 and 2008.
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Edit Tips

  • Follow companies that Warren owns and invest in them. They can be found out by reading Warren's letters to his shareholders online.
  • Buy when Warren buys, but not necessarily the same stocks. These purchases are in the news and you can even buy a stock that Warren buys after the stock dips. But be careful not be pay a price much higher than he did. A stock that is attractive at $10/share may be grossly overpriced at $40/share. Make sure also to do your own research as always. Everyone makes mistakes, and Buffet is no exception, as he freely admits.
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Edit Warnings

  • Warren says that unless you are willing to invest for 10 years and wait out any downturn then don't invest.
  • Warren says that he learned to throw away all sorts of unsolicited mail that is sent to him that only recommends one company. These salesmen are trying to boost up a stock and sell it to unsuspecting investors.

Edit Sources and Citations

  1. ↑ Frank K Martin, A Decade of Delusions: From Speculative Contagion to the Great Recession, (2011), ISBN 978-1-00456-2

Article Info

Categories: Investments and Trading

Recent edits by: DifuWu

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