Investing wisely in the securities market using Buffett’s time-tested techniques
Investing wisely in the securities market using Buffett’s time-tested techniques
Investing in the stock exchange can be a successful way of making money, whether as a source of additional cash to supplement income, generating “passive income” or even in achieving “financial freedom”.
It is not without risk, however, as investments can go down as well up. To increase the chances of success, it is important to carry out research – on factors including risk, expected return, choice of industry, among others – before making investment decisions.
Warren Buffett – the chairman and CEO of Berkshire Hathaway, nicknamed the “Oracle of Omaha” – began his career in investments in the 1950s, becoming a billionaire in 1986.
Buffett – the world’s sixth richest person with a net worth of $104.2 billion as of last month, according to Bloomberg Billionaires Index, and perhaps the most famous and successful investor ever – has been renowned over the years for offering sage investment advice.
Conducting thorough research, he advises, is essential. Investors should comprehensively study the companies first to determine intrinsic values before investing, and then purchase undervalued stocks for a long-term hold to generate more profits, he has said.
Buffett’s investment strategies
Fully understand the company
A Buffett hallmark is to comprehensively study the companies he is interested in investing in rather than following market trends or supply and demand factors.
Taking time to research a company’s business plans enables investors to observe how sustainable the company is and its growth prospects. Buffett focuses on key indicators such as return on equity, debt to equity and profit margins.
His watch-list also includes a company’s business strategies as well as the effectiveness of its management regarding decision making, which can have a serious bearing on its business.
Invest in undervalued stocks
As a long-term investor, Buffett focuses on whether stocks are undervalued. By investing in such stocks, he looks for opportunities for an increase in the market share price compared to its intrinsic value over the long term, which enables him to earn greater profits compared to a short-term investment.
To find the intrinsic value, he predicts the future income of a company and uses a discount method to find the present value.
He also targets the stocks of good and potential companies, especially when the price drops or the shares are being ignored by the market. By doing so, investors will be able to earn more in the future when the price surges.
Be an active investor
While Buffett is a long-term investor, he never ignores his portfolio. He screens out and sells overvalued stocks, and then invests that capital in other undervalued stocks.
He studiously analyses information related to business operations, such as financial statements and the financial news.
Regularly checking and analysing his portfolio and following the news enables him to be ready to seize good opportunities to earn more capital gains by selling stocks as when needed.
Such golden chances occur when a stock price reaches or goes beyond its intrinsic value.
Stocks will also be sold if Buffett foresees the arrival of uncontrollable issues that will cause the price to plummet. In early 2020, he sold stocks in big four carriers American Airlines, Delta Air Lines, United Airlines and Southwest Airlines after projecting that the airline industry would encounter a long-term crisis due to the Covid-19 outbreak.
American Airlines Group Inc’s stock price, for instance, dipped from nearly $30 per share in early February 2020 to around $9 in mid-May of that year. And in spite of a gradual recovery, the price is yet to reach the previous highs.
Buffett investment tips
Investors should think long-term:
“Nobody buys a farm based on whether they think it is going to rain next year. They buy it because they think it is a good investment over 10 or 20 years.”
Investors should stay the course:
Instead of following trends, investors should remain calm and believe in their own investment decisions. “Though markets are generally rational, they occasionally do crazy things.”
Invest in yourself: “Anything you do to improve your own talents and make yourself more valuable will get paid off in terms of appropriate real purchasing power.” Sources: Investopedia; Money Crashers; Forbes; The Balance; Berkshire Hathaway; CNBC Make It; and GOBankingRates.
