Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Invest Like the Market Oracle of Omaha, Warren Buffetts Rules

InvestorEducation / Learning to Invest May 01, 2012 - 07:01 AM GMT

By: Money_Morning

InvestorEducation

Best Financial Markets Analysis ArticlePatrick Vail writes: For months, the Obama administration has been using Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman and CEO Warren Buffett's considerable name recognition to try to change how America's top earners are taxed.

The fate of the so-called "Buffett Rule," which would apply a minimum tax of 30% to individuals making more than $1 million a year, still has yet to be determined. Chalk it up to politics as usual.


There is, however, a list of other Buffett Rules that are far more useful to investors.

They're the tricks of the trade that have made Warren Buffett the most successful living investor, and one of the richest men in the world.

After all, the Oracle of Omaha hasn't earned his nickname by mistake. To many, it seems the billionaire has a sixth sense when it comes to investing, a supernatural ability to divine the good investments from bad.

But while his ability may be uncanny, there's really no magic at work. What Buffett has above all else is discipline. His philosophy is based on patience.

As a value investor, Buffett's goal is to identify companies the market has undervalued or companies that are trading cheaply compared to their intrinsic value.

Once he finds them, he buys them and holds on to them for the long term while their value steadily increases over decades.

Warren Buffett's Rules for Successful Investments
Beyond those simple tenets, there are a few rules - those other Buffett Rules - that guide Buffett's conscience as he makes investment decisions.

Rule No. 1: Consistent Performance
Warren Buffett won't even consider a company unless it's been around for 10 years or more and can demonstrate a record of consistent performance.

One metric Buffett uses to track performance is return on equity (ROE). ROE measures the rate of return on the money invested by stockholders and retained by the company in profitable times, demonstrating a company's ability to generate profits from shareholders' equity (net assets). In other words, ROE shows how well a company uses investment funds to generate growth.

Last November, after years of eschewing technology stocks, Buffett sank $10.7 billion into International Business Machines Corp. (NYSE: IBM). A quick look at IBM's ROE tells much of the story. With a stellar 73.40% ROE, IBM is in the 98th percentile overall, and the single-best performer in its industry.

The Coca-Cola Co. (NYSE: KO), another of Buffett's holdings (he owns 200 million shares), has a less astronomical - yet still very impressive - ROE of 26.18%

Rule No. 2: High Income
Buffett has said that one of the best ways to stay wealthy is to invest in companies with a stable business and a high dividend. As a buy-and-hold investor, Buffett minimizes his tax liability by remaining in his positions for years, even decades.

Dividend stocks help to balance out a growth-oriented portfolio, which is what you'll have if you're following Buffett's footsteps. Your portfolio will be more diverse, and you'll be insulated a bit from market volatility.

In Buffett's portfolio, you'll find high-yield stocks like General Electric Co. (NYSE: GE), which yields 3.60%, and GlaxoSmithKline plc (NYSE: GSK), which pulls in 5.80%. You'll also find ConocoPhillips (NYSE: COP), in which Buffett has $2.1 billion invested. COP has a market cap of $96.8 billion and is yielding 3.60%.

The important thing to look for is dividend growth. As the company grows and the stock price goes up, does the dividend rise? Look for companies that have increased their dividend each of the last several years.

Rule No. 3: Manageable Long-Term Debt
Warren Buffett, as a general rule, doesn't like debt -- especially long-term debt. The debt-to-equity (D/E) ratio tells investors what proportion of equity and debt the company is using to finance its assets. A high D/E ratio can lead to greater volatility in a company's earnings. But what's really important is how much debt a company has compared to its competition in the same industry. All of Buffett's positions take a prudent approach to debt.

Take, for example Johnson & Johnson (NYSE: JNJ). Its D/E ratio currently sits at 0.3439, which is about average. But over the last five years, it's 0.2648, a bit better than average.

Intel Corp. (Nasdaq: INTC), another of Buffett's newer holdings, has averaged a D/E of 0.064 over the past five years. Visa Inc. (NYSE: V), in which Buffett has a nearly $100 million stake, has had a microscopic D/E ratio of 0.030 over that same period.

While he only speaks about debt in a general sense, it is believed that Buffett is most concerned with a company's ability to repay its debts. To figure this out, simply divide the long-term debt by profit. In the case of JNJ, it would take just a bit over three months for it to pay off its long-term debt, which is very manageable.

Rule No. 4: The "Economic Moat"
High profit margins relative to a company's closest competition are extremely important. This creates what is known as an "economic moat," a term coined by Buffett to describe a company's competitive advantage. Economic moats help defend against competitors that try to gain market share by imitating successful products. In short, an industry leader itself can be an imposing barrier to entry, and those are companies Buffett thinks have value.

Look at Procter & Gamble (NYSE: PG), owner of brands like Tide, Pampers, Oral-B, Gillette, and Duracel, to name just a few. PG's long-term strategy is to compete only in markets where it is first or second in market share. That leadership position allows the company to comfortably raise prices when its costs go up, and its many popular brands represent pretty high barriers to entry in most of the markets in which they compete.

Rule No. 5: Sound Management
Buffett has said that investors should buy stocks as though they are buying the company. Buying stocks, therefore, is a vote of confidence in how that company is managed.

Evidence of good management, in Buffett's view, is when management's actions deliberately benefit shareholders. This includes things like share buybacks, wise use of retained earnings (transforming earnings into market value), and focusing on the core business. In general, it's when management acts as a good shepherd for its shareholders' money.

Berkshire's holdings read like a who's who of well-managed companies: Kraft Foods Inc. (NYSE: KFT), Wal-Mart Stores Inc. (NYSE: WMT), M&T Bank Corp. (NYSE: MTB), Sanofi SA (NYSE: SNY), and U.S. Bancorp (NYSE: USB), to name a few.

So there's no magic or extraordinary clairvoyance illuminating Buffett's great investments. There's not even a complicated trading strategy at work.

It is just a simple, principled approach to investing that's made Warren Buffett a billionaire several times over.

Source :http://moneymorning.com/2012/05/01/warren-buffett-stocks-how-to-invest-like-the-oracle-of-omaha/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in