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Step 1
Warren Buffet has a rule. This rule is usually alluded to as Rule Number one. This rule is to never lose money. No matter what, losing money is out of the question. With this in mind he looks at stocks as though he was the actual owner of the whole company. So he looks at the stocks, not just as stocks, but as small pieces of ownership in that particular business. He is not going to invest money if he is not sure about “his” company or business.
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Step 2
Keep in mind that Buffet is not a trader. He is an investor. He is looking at the big picture and for him, the big picture is not tomorrow, or next week, or next year. It usually is ten years or longer. His other motto is “to never own a company for ten minutes, if you do not plan own it for ten years.” He is what is considered a value investor and a long term investor. He pays no attentions to the gyrations of the stock market on daily basis. His philosophy is that of a buy-and-hold strategist as to maximize his gains.
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Step 3
Buffet looks at different areas to see exactly how and why he would invest his money in this company. He first looks to see how what the share of the company is actually worth. This is his intrinsic value of the company. He will look at a company’s growth rate and discount rate to determine whether the stock is somewhat attractive. These rates can be found on the company’s 10-k reports.
Book value is one of Buffet’s favorite things to look for in a company. He strongly feels that if a company continually increases the per-share book value at high rates over time it will reward its shareholders. Over time there has been a strong correlation between book-value growth and share-price growth. -
Step 4
Return on equity is another of Buffet’s favorite barometers. Return on Equity (ROE) can also be found on a company’s 10-K and/or annual report. The ROE is: net income (ending equity plus beginning equity)/2
Buffet looks for companies that will give him at least 15% per year. It is the minimum return he requires to ensure him for inflation and taxes when he does eventually sell. He also looks for companies with a strong Moat and a Margin of Safety or MOS. The moat is considered the uniqueness and anything that the company has that other competing companies do not or lack. -
Step 5
Though this is not an exhaustive way that Buffet buys stocks it is a condensed outline of what he does. There are many sources out there that will help. Learning how to invest takes patience, time, and perseverance, and a lot or reading. Good luck.
