Who hasn't heard of Warren Buffett? He is one of the richest men and a legendary investor with assets of over $80 billion as of 2020.
The principle Buffet follows is value investing. Value investors are mainly people who look for stocks that are undervalued by the markets and have high value in the future. They generally look for such companies by analysing the company's fundamentals.
Buffett chooses stocks completely based on its potential as a company and then holds them for the long term. He mainly seeks to buy stocks in quality firms that can generate strong profit and revenue over the years.
Buffett is not generally concerned with the immediate market performance of the stock, meanwhile, he waits for the company to do well in its business and turn profitable.
He looks for low priced stocks with huge growth potential and he does that mainly by analysing:
1) Understanding the company: He looks for firms that have stable performance over the years and have a good RoE (Return on equity). He also prefers companies that have been listed for at least 10 years before investing in them. It is also very important for Buffett to completely understand the business of the company before investing in it.
2) Profit Margin: This is another key indicator that Buffett looks for before investing in companies. The company should not only have a higher profit margin but it also should be consistently rising over the years.
3) Debt: It is another very important aspect of a firm that must be considered. The debt to equity ratio is another key characteristic that Buffett looks for before investing in a firm. He prefers firms with smaller debt and hence smaller debt to equity ratio. Any company with a large debt is susceptible to higher expenses and hence lower profits.
4) Stock Valuation: Buffet mostly looks for companies that meet the other criteria but is also undervalued by the market. He determines the value by analysing the firm's revenue, debt, earnings and other fundamentals. This is called determining a firm's intrinsic value, which is basically a measure of what it is worth.
Some of his long-term stock picks include names like Coca-Cola, Nike, Procter and Gamble, and Costco, American Express among others. Warren Buffet has been a long-term investor in these stocks and gained handsome returns on the way. It is very essential to properly research a stock before investing in one and these are some pointers of how Mr. Buffett does it.