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Buffett’s Investment Philosophy Simplified September 30, 2014

Posted by shaferfinancial in Finance, Uncategorized.
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When the market is going up, every one is a genius. But, to really understand how great investors do it, you need to look at their long term strategies.

Warren Buffett’s Strategy is simple to understand and very difficult to do:

1. Identify well managed companies;
2. Analyze their medium term outlook by understanding if they have a “moat,” meaning an enduring advantage over others in their same business;
3. Look at their books to make sure they have a business model that makes sense for the business they are in;
4. Calculate a fair price for that business;
5. When the price is at or below that fair price buy; and
6. Hold until the moat is gone, management disappoints, or some fundamental change in the economic environment causes you to reevaluate the business.

Easy as pie!

Here is the kicker, the vast majority of people will react to price movements, especially extreme price movement. If the companies stock starts to tank they will panic and sell. Buffett has the psychological makeup to stick to his analysis ignoring the market emotion. Since he has done his own due diligence he has the confidence to ignore the chatter out there. He also knows that most of the analyst that work for the major brokerage firms are relatively young and inexperienced. There is also the reality that in some incidences the brokerages own accounts tend to work opposite what their own analyst are saying, so they are buying up cheap stock as their own analyst are saying sell and they are selling when their own analyst are saying buy [with an appropriate short time lapse to not be too obvious about it].

Due to technical reasons the market is even more volatile than it was back in the day which puts even more pressure on folks who think they are missing the real reason a stock is going down that the insider’s know.

Bottom line, for me, is that I have found having stocks that pay a good to great dividend gives me the ability to ignore the market chatter [along with re-reading Buffett!]. That dividend carries me through a stock drop or a general bear market. Understanding how one of the greatest investor in history thinks about investing is a gift that continues to give.



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