7 Secrets to Investing Like Warren Buffett (2024)

(Work in progress)

Power of Habits

Summary of Generating stocks ideas chapter:

Qualities to look for in stocks
1. Profitable business
2. Lots of loyal customers
3. Always ahead of trends
4. Market leader
5. Good growth potential

- visit malls to see which shops have lots of customers
- observe what items you have to buy on a regular basis and determine which companies you will buy them from
- Google the companies with top rated brands
- check out what seasoned investors are investing in
- use investment screens

Circle of competence: areas that you are interested in and are a expert.
If you can not find things within our circle of competence, Don't expand the circle. Wait!

Finance websites:
1. Yahoo! Finance- publishes news really quickly
Look for bad news! When a company has a bad news, it's stock price will fall because people tend to overreact.
Find if it is some temporary trouble that will not affect their business model dramatically and buy the shares when they are undervalued

2. Seeking Alpha- it is a platform that allows contributers from all over the world to share their opinions on stock investments.

3. Buffett Online School (this is a facebook page)

They share investment videos and articles to educate public on value investing. Suitable for new investors.

4. MarketWatch- it is virtual stock exchange to have ample practice before diving into the real market. It is very US centric.

5. The Wall Street Journal website
Has fin information on stocks all over the world. Search for stocks in search box and you will get four years of financial data moments

6. GuruFocus website- tracks investment portfolio of some of the most famous investors in the world. And, has articles on value investing.

7. The Motley Fool (www.fool.com)
It is stock advisory website that provides opinions beyond financial data, business potential, and company culture

Track rich people:

NCAV per share= NCAV/ total shares

2. Margin of Safety: Advise is to buy a stock at below 2/3rd of NCAV per share.
(Meaning of this is evening if company closes today, we still make money- buying below liquidation value)

But still things can go wrong. Company may choose not to close even if it loose money and net current asset value run dry over time.

Hence, Warren advices to only invest in circle of competence. He never invested in tech stocks because he did not understand them well.

2. Price-to-book value/Net Asset value (NAV) method

Note: This method considers both current and non-current assets.

NAV= book value=equity=net worth

NAV per share= equity/no. Of shares

Margin of Safety is 20%

So, if stock price< 80% of NAV per share, buy it

Other way of calculation: ( most websites do this way)

Price/book:-

stock price is used for price & book value of equity is used for book

So, if price/book ratio is less than 0.8 buy it

This method is used for physical asset heavy companies only.
Service companies like Google, Facebook do not require huge asset to run their business. Warren does NOT invest in such business. He invests only in physical asset heavy businesses.

3. Price-to-earnings (PE) Ratio

A. Compute avg historical PE ratio of the company
B. Take 30% margin of Safety: 0.7* avg historical PE ratio
C. Look at current earnings per share (EPS)
D. EPS* value we got in B will be our entry price of stock.

4. Dividend yield

= Expected divided per share/share price

Check if divided paid is consistent. If it is paid for past 10 years, it is considered consistent.

Aim for dividend yield to be higher than 2% of risk free rate. Risk free rate is higher of bond rate & bank deposit rate.

Summary of Portfolio Management Chapter
1.

Diversify your portfolio.
Nobody can be right all the time. Diversifying our portfolio shows that we are humble and smart enough to give ourselves right to be wrong and still have the ability to profit from our overall portfolio.

There are two types of investors;
1. With discipline to diversify
2. Bet-it-all gambling mindset- loses money

Rules;
1. Enter into stock or market when it is undervalued.
Warren stayed out of the Market in 1969 when stocks where overvalued and got back after four years.
2. Never put more than 10% in any stock.
Allocate funds based on your confidence but should not be more than 10% in any particular stock.
3. Stronger the stock, higher weight. But not more than 10%
Rank the stocks and allocate
Eg: rank A- 10%
rank B- 9%
rank C- 8%
4. Review your portfolio at least once a year.
Read annual reports and quarterly reports. Take notes of any news from ordinary.
5. Do NOT sell purely based on price.
If fundamentals have declined and you have lost confidence in the business, then sell if off.
If price decline and fundamentals are stong, in fact buy more of it. Warren does it.
6. Do NOT sell when prices rises
Review the business and revaluate price based on valuation methods.
If based on valuation methods, stock is considered undervalued, in fact buy more.
If business is performing well, you may choose to not sell.
Go back to fundamentals!

Summary of Mindset of a successful investor

1. Patience: impatience & eagerness to get rich quickly is the key cause of failed investements and people buying into scams that promise high returns
2. Independent thinking/ Contradiction thinking: Being able to stand against the temptation to follow the crowd is the mark of a true contrarian investor
3. Focus: Focus on your circle of competence & remained focused.
Charlie Munger says- our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.
4. Consistency

Game plan

1. Pay yourself first
2. Save up for an emergency fund- if you loose your job, you with have enough money
3. Get insurance- savings can be wiped out to a bad accident or health issue. One should get an insurance plan that covers accident, critical illness, and hospitalization.
4. Clear your debts
5. Invest and compound