How to Pick Stocks Like Warren Buffett. Warren Buffet is the most successful investor in the history of the stock market. He started investing with ten thousand dollars earned from a paper route and went on to become one of the wealthiest people in the world. While he has not revealed his exact methodology for picking stocks, Mr. Buffett has spoken publicly often enough on the topic to allow a person to follow his method of picking stocks like him with proper study and discipline.
Select solid companies with a stable history of revenue growth. Warren Buffett did not make the majority of his wealth by speculating on unproven stocks. He chooses stocks that for whatever reason have seen a price decline but remain leaders in their industries.
Choose stocks that have a per share price of above ten dollars. Anything below this price for a stock usually signifies unproven or unstable companies. In addition, these stocks, because of their low price, usually have more speculators investing in them. Mr. Buffett preaches investing in the company and not the stock, which is what speculators do.
Depend on historical results of the stock, not what analysts are saying about it. Warren Buffett insists on investing in stock based on the numbers and not the opinions of others.
Use return on equity (ROE) to measure profitability. ROE is net income divided by shareholder equity, or the book value of a stock. Mr. Buffett uses this financial tool to measure profitability. The minimum ROE will vary per industry, but 15 percent is a good baseline to gauge a stock's profitability.
Utilize overall profit margin as a secondary profitability gauge for a stock. When picking stocks like Warren Buffett, you need a second check figure to reinforce the profitability of a company, and Mr. Buffett uses overall profit margin. Overall profit margin is net income divided by total sales. Ten percent is usually a good baseline for overall profit margin.
Stay away from stocks that have a large amount of debt. Mr. Buffett usually picks stocks with a debt-equity ratio of 25 percent or lower. To compute the debt to equity ratio divide long-term debt by the book value of the stock.