Who wouldn’t want to invest successfully like Warren Buffett? The so-called “Sage of Omaha” was declared the World’s Richest Man in 2008. He’s famous for early stage investments in Coca Cola, Gillette, See’s Candy and Amex, along with others.
I’m going to focus on one particular aspect of Warren Buffett’s investing style; his number one rule don’t lose money. Funnily enough his second rule is don’t forget rule number one. The reason why this rule matters is down to maths and is important because losses are really hard to recover. E.g. If you own a stock that drops 50% in value, just to break-even you will need that stock to rise 100% just to get back to where you started from.
Ok So How Can You Not Lose Money When You Buy Shares?
Warrens Buffett’s answer is you look for good companies at cheap prices. There’s no point in buying a good company that is expensive and everybody else knows about it.
Warren Buffett Investment Tips
Focus on Companies that have:
- High Return on Capital Employed + little or no debt.
- Predictable Earnings – You don’t want to get surprises, you want companies with steady earnings. E.g. Coca Cola
- Profits backed by cash flow. (Profits = Cash flow) Analysts call this cash cover; you should look at the cash flow statement and check that the cash from operations is in line with operating profit. Buffett doesn’t like firms with lots of profits being generated and have virtually no cash.
- Uncomplicated business models and is easy to understand to you. Warren believes you must understand the business you are investing in and if you don’t you’re just playing the lottery. It’s simple find businesses you understand. E.g. During the dot com bubble people didn’t have a clue how these companies were ever going to make money in the future.
- Strong branding combined with pricing power. Good companies can charge higher prices to consumers even during a recession. E.g. Gillette. Businesses with strong brands are less likely to be undercut by competitors with lower prices.
- Management need to be the owners of the business, not 100% which is not possible if it is listed on a stock exchange. Management need to have a high stake in the future of the business. There are two extremes when it comes to paying managers. You can pay them a massive salary or you can pay them no salary and give them shares or share options. If management has its own cash at stake in the business they are more committed to raising the share price of the company.
These tips won’t turn you into Warren Buffet but will you help you become a more informed investor.