When you want to learn about investment and personal finance, you should trust the master instead of paying heed to the market noise. When it comes to investments, there is no name bigger than Warren Buffett, at least in the contemporary world. From time to time, this billionaire doyen of investment keeps sharing his secrets.
Here we list out top ten investment tips shared by Warren Buffett
1. Buying stock when it is available cheaply: No matter how good a stock is, and what its fundamentals are, it is imperative to figure out whether the stock encapsulates its intrinsic worth. And if it does not, then it should not be bought, at least not at the moment and at the current market price.
2. Evaluate company’s performance: Warren Buffett focuses on measuring a company’s performance by calculating return on equity.
Return on Equity (ROE) can be measured as Net Income/ Shareholder’s Equity.
3. The present doesn’t necessarily give indication for the future: Just because some stock or industry is booming at present is no proof that it will continue to grow at the same or faster pace in future. He gives the example of automakers in the early 20th century.
Over 2,000 auto companies entered the market that time, but only three were left by 2009. So, keeping this in mind, he advises to refrain from merely chasing the upcoming trend in the market.
4. Relying on index funds is not bad: He advises investors to invest in the S&P 500 index fund since it increases over a long term. One can straightaway buy an index fund or through an ETF. He advises passive investors to bank upon America’s index fund.
In the Indian context, one can consider buying S&P BSE Sensex, or Nifty50 which have 30 and 50 key constituent stocks, respectively.
5. Don’t treat investment like a game: Warren Buffett warns young investors against treating investment like a game. He says it is not imprudent to use investing and trading apps so long as one doesn’t treat them like a game. Investing is serious business, after all.
6. Closely monitor profit margins: Warren Buffett believes that a company’s profitability is determined by a good profit margin which is calculated by dividing net profit by net sales. The investors should closely monitor the past five years of profit margins of the company.
If the profit margin is high, it means the company is doing business well. And if the profit margin is increasing, it means the management is efficient in conducting its business.
7. Company’s competitive advantage: Another key factor that Warren Buffett focuses on is the company’s product which should be distinct from its competitors. If the company has qualitative products, it means its economic moat is wider. And the wider this moat is, the tougher it will be for competitors to grab market share.
8. Debt to equity ratio: The Oracle of Omaha assesses a company’s earning and growth potential by its debt-equity ratio also. This can be calculated by the following formula:
Debt to Equity Ratio: Total Liabilities/ Shareholders’ Equity
A high Debt Equity ratio leaves less money in the hands of the company since it has to pay a higher amount of interest on its loans.
9. Stay cautious: With growing acquisitions in the market, and skyrocketing valuations of companies, Warren Buffet stays cautious of the real worth of companies and advises others to stay careful too.
In view of the stratospheric valuations of companies, the investors and shareholders must stay on guard at all times, and not get carried away with big numbers and figures.
10. Buy it like a house: Warren Buffett advises to buy a stock the way you would buy a house. He tells investors to understand it and like it so that you would be happy to own it even without any market.
So, we can summarise that Warren Buffett advises new investors to understand a company from all quarters – its profit margin, debt-equity ratio, return on equity, competitive advantage. Aside from this, one can also invest in index funds to spare the trouble of shortlisting individual stocks.