When it comes to stock investing nothing beats the principle of value investing and even better is the way our genius Buffett practices value investing. Here we will try to see the most probable top 10 stock investing strategies that are likely followed by Warren Buffett for building portfolio of Berkshire Hathaway.
To give every one a sense of optimism related to stock investing after the stock market crash of 2008/2009 I would say that mastering stock investing is controlling one sense towards investment. It would not be wrong to say that Warrens Buffett’s control over his investment psychology has made him the best investor of all times.
Few of Buffett’s psychology and his investment wisdoms are discussed below as stock investing tips for new investors:
Stock Investing Tip (1): Live a very modest life, always avoid lavish spending.
In other words save as much as possible to enable you to invest majority of your earnings. Though Warren Buffett is among the richest men in the world but he still lives in a very modest house and still drives his own car. He believes that majority of his earnings shall be used for stock investing to build as much asset as possible. Warren Buffett believes on spending his money to buy assets and avoid liabilities.
Stock Investing Tip (2): Avoid being a compulsive buyer and seller of stocks.
It is not always important to keep on buying and selling stocks. Buffett’s believes that investors shall show patience and should be ready to wait indefinitely for that right time to invest their savings. The right time as per Buffett is during stock market collapse where great companies stocks becomes undervalued and are worth buying.
Stock Investing Tip (3): Do not buy stocks what everyone else is buying
It is best to buy that stock which has not drawn attention of others. When everyone starts buying a particular stock its market price is bound to go up above reasonable price levels making it overvalued. Or in other words buy those stocks which are considered as bad purchase by majority of investors. Of course it is important to check the fundamental of the company before buying one.
Stock Investing Tip (4): Buy stocks of companies which has simple products and services
eBuy stocks of company whose product or services are understandable to you. Understanding the business process is important before buying its stock.
Stock Investing Tip (5): Use your own method to evaluate value of stocks
The basic of any stock investing strategy is to learn the process of fundamental evaluation of a company. It is also important to learn the trick evaluating the value of stocks. Fundamental analysis and stocks valuation are two preconditions of value investing.
Stock Investing Tip (6): Always buy undervalued stocks
Warren Buffett calculates an intrinsic value of stock. If the market price of stock is below its intrinsic value then it can be termed as undervalued stocks. Warren Buffett first checks the fundamental strength of company and then calculates its intrinsic value to judge its status of being overvalued or undervalued. Warren Buffett calls purchase of undervalued stocks as buying stocks by maintaining “margin of safety’. The trick Warren Buffett uses to calculate the intrinsic value of stock is the heart of his stock investing wisdom. Intrinsic value is nothing but present value of all future cash flows linked with a particular stocks. In calculating the intrinsic value Buffett pays more attention to (a) return on equity, (b) operating margin, (c) and on reasonable or no debt at all. Warren Buffett does not do analysis of stocks on basis of only one year figures; instead he works on figures for at least last five years.
Stock Investing Tip (7): Buy stocks of companies doing monopoly business
Such companies are becoming less and less in today’s world, but still there are companies you can find who can manipulate their selling price at will without effecting their sales a lot. One example is Microsoft’s Windows OS, Airbus A380 and likes. It may be difficult to locate too many of Microsoft’s today but careful study will make it evident that there are companies that enjoys major competitive advantage than others. Warren Buffett will buy such companies over others.
Stock Investing Tip (8): Only confused people diversify their investments.
If you will ask Warren Buffett about investment diversification he will give you a glare eyes. He believes that all investors shall be ready to wait indefinitely till stocks prices of fundamentally strong companies become undervalued. Till such time all investors shall save all of their earnings, so that when the time comes they shall not fall short of money for stock investing.
Stock Investing Tip (9): Buy stock to hold it for life.
This does not mean that one shall go on holding a stock even if the business has gone sick. Warren Buffett says that periodic evaluation of portfolio is very important. If the company us loosing its competitive edge or its fundamental superiority then it is better to quit it than holding it forever. But what Buffett means when he says that ‘hold it forever’ is that before you buy stock you should evaluate the stock such that you are going to hold it forever as your kids.
Stock Investing Tip (10): Do not do investment to make money, instead invest your money with the objective of generating more and more assets.
There are people who enter stock market for making quick bucks. Warren Buffet will call such people fools. Stock investing is not for making quick bucks, instead it is longer term money making machine. The term is so long term that investors even loose the interest of making money. Then what is the motivation for such long term investors? Their drive for investment is drives by their desire to become financially independent and go on accumulating as much “asset” as possible