How to Invest Like Buffett

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By David Sarokin
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Warren Buffet, one of the world's most influential investors

Warren Buffett, one of the world's richest individuals and a billionaire many times over, is widely acknowledged to be one of the greatest investors of all time. His investment company, Berkshire Hathaway (BRK), is admired with almost religious fervor in the investment community. Buffett's investing strategies, along with his statements and letters to shareholders of BRk stock, have been studied and re-studied by those hoping to be successful and wealthy investors in the stock market.

Happily, Buffett is also a plain-spoken fellow, whose investment approach is not difficult to understand or to emulate. He has been nicknamed the Oracle of Omaha for his stock picking prowess. Here's what you need to know to invest like Buffett.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

Moxie

Step 1

**Invest for the Long Term**

Buffett has famously said that if you arent' willing to own a stock for ten years, then don't even bother owning it for ten minutes.

Evaluate a company's prospects for thriving over the next decade or so, rather than focusing (as so many investors do) on the next quarter's earnings.
Step 2

**Know the Business**

Understand what a company does, and how they earn their money. If only investors who had poured funds into Enron had heeded that simple advice! If it's not clear what a company does and how they make money, then find another investment target.
Step 3

**Find Companies With a Long-Term Competitive Edge**

Who stands out in a given sector, has been a stand out for a long while, and is likely to continue being a leader for years and decades to come?

Lots of companies sell soft drinks, but there's only one Coca Cola (one of Buffett's largest holdings).
Step 4

**Look for High Return, Low Debt**

Buffett looks for companies with a consistent and impressive return on equity (ROE, a measure of profit divided by a company's book value). While an ROE of 12% is typical for profitable businesses, Buffet focuses on companies with a track record of an ROE of 15% or more.

At the same time, companies with relatively low debt are demonstrating their success at selling product, and generating the cash necessary for future growth...another Buffett target.
Step 5

**Look Carefully at Profit Trends**

It's great if a firm is profitable, and has been so over the years. But how is their profitability trending...is it stagnant, or is it showing good growth. Steadily increasing profit margins can indicate a company's success at finding new markets and new efficiencies, to simultaneously increase sales and contain costs.
Step 6

**Buy Low, Sell High**

Hah, hah! But seriously, the market provides opportunities to buy companies at fire sale prices, and investors should be on the look-out for a good discount.

If a company experiences a temporary market set-back -- an embarassing product recall, perhaps -- that you think it can recover from, then that might be a good time to invest.