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    How Buffett Does It (PB): 24 Simple Investing Strategies from the World's Greatest Value Investor
    How Buffett Does It (PB): 24 Simple Investing Strategies from the World's Greatest Value Investor
    How Buffett Does It (PB): 24 Simple Investing Strategies from the World's Greatest Value Investor
    Ebook131 pages1 hour

    How Buffett Does It (PB): 24 Simple Investing Strategies from the World's Greatest Value Investor

    By James Pardoe

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    About this ebook

    A concise, no-nonsense rulebook for investors looking to achieve Buffett-like results

    Warren Buffett is one of the wealthiest investor in the world. Millions of independent investors follow his every move. But why Buffett? What signs does he see that others miss? And more important, what can investors do to follow Buffett's path to investment and financial success? How Buffett Does It explores the 24 primary rules Buffett has followed from day one, and that people from market novices to seasoned veterans can use to strengthen their investing results.

    Drawing from literally hundreds of quotes and maxims, Buffett admirer and attorney James Pardoe has chosen those that encapsulate and explain the Buffett legend. This plain-talking and investor-friendly guidebook takes readers on an in-depth journey through strategies including:

    • Focus on not losing money rather than making it
    • Don't own any stock for 10 minutes that you wouldn't own for 10 years
    • Be fearful when others are greedy and greedy when others are fearful
    LanguageEnglish
    PublisherMcGraw-Hill Education
    Release dateJul 18, 2005
    ISBN9780071622578
    How Buffett Does It (PB): 24 Simple Investing Strategies from the World's Greatest Value Investor

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      a great read with timeless principles that could be a beacon of rational approach to investing

    Book preview

    How Buffett Does It (PB) - James Pardoe

    CHAPTER 1

    Choose Simplicity over Complexity

    When investing, keep it simple. Do what’s easy and obvious, advises Buffett; don’t try to develop complicated answers to complicated questions.

    Many people believe that investing in the stock market is complex, mysterious, and risky and therefore is best left to the professional. This common mind-set holds that the average person can’t be a successful investor because success in the stock market requires an advanced business degree, a mastery of complicated mathematical formulas, access to sophisticated market-timing computer programs, and a great deal of time to constantly monitor the market, charts, volume, economic trends, and so on.

    Warren Buffett has shown this to be a myth.

    Buffett has figured out a successful way to invest in the stock market that is not complex. Anyone with average intelligence is more than capable of being a successful value investor, without the assistance of a professional, because the fundamentals of sound investing are easy to understand.

    Buffett will only invest in easy-to-understand, solid, enduring businesses that have a simple explanation for their success, and he never invests in anything complicated that he does not understand.

    Remember that degree of difficulty does not count in investing. Look for long-lasting companies with predictable business models.

    The essence and beauty of Buffett’s investment philosophy is its simplicity. It doesn’t require complicated math, a financial background, or knowledge of how the economy or stock market will fare in the future. It is based on common-sense principles and patience—midwestern values that any investor can understand and implement. In fact, Buffett believes that investors do not help themselves when they rely on such things as mathematical formulas, short-term market forecasts or movements, or charts based on price and volume.

    In fact, says Buffett, complexity can work against you. Don’t drive yourself crazy trying to decode the latest theories about investing, such as options pricing or betas. In most cases, you’re better off not even knowing about these cutting-edge systems. An important lesson that Buffett learned from his mentor, Ben Graham, was that you don’t have to do extraordinary things to get extraordinary results.

    Keep it simple. Here’s your goal: Buy stock in a great company, run by honest and capable people. Pay less for your share of that business than that share is actually worth in terms of its future earning potential. Then hold on to that stock and wait for the market to confirm your assessment.

    This is the core principle of Buffett’s philosophy of investing. It explains all his incredible achievements. It explains how he turned a $10.6 million Washington Post stock investment into a holding presently worth more than $1 billion, how he made a $1 billion Coca-Cola stock investment that today is worth more than $8 billion, and how he bought $45 million worth of GEICO Insurance shares and saw his investment grow to more than $1 billion.

    If you don’t understand a business, don’t buy it.

    Buffett has turned Berkshire Hathaway into a $100 billion-plus company using this simple guiding principle. When investing in the stock market, he puts his money in easy-to-understand, solid businesses with strong, enduring prospects and capable and ethical management in place. He buys lots of shares when the stock market is selling them at a discount. In a nutshell, this explains his success.

    Forget sophisticated stock-picking computer programs that key on price history, volatility, or market direction. Furthermore, discard equations full of logarithms and Greek letters. Buffett does use a computer—but mainly to play bridge and not to track stock price movements. Your investment goal should be the same as Buffett’s: on the lookout for reasonably priced shares in understandable businesses that have a strong likelihood of higher earnings growth in the years to come. That’s it!

    Here are three principles that should underlie all your investment decisions:

    Always keep it simple. Don’t make investing unnecessarily hard. Stick with what you know and buy solid businesses that have strong and ethical management. Investment decisions that involve complexity should be avoided.

    Make your own investment decisions. Be your own investment advisor. Beware of brokers and other salespeople who aggressively push an individual stock or mutual fund to fatten their commissions. Obviously, these individuals don’t have your best interest at heart.

    Study the man who Buffett studied under. The man who had the greatest influence on Buffett besides his father, Howard, was Benjamin Graham, the father of value investing, who taught Buffett decades ago that success in investments doesn’t necessarily grow out of complexity. It’s a good idea to read what he has to say.

    Don’t forget that Buffett’s simple strategies have led to his extraordinary results.

    CHAPTER 2

    Make Your Own Investment Decisions

    Don’t listen to the brokers, the analysts, or the pundits. Figure it out for yourself.

    Warren Buffett believes that the average person is capable of investing successfully without relying on brokers, stock market pundits, or any other professional. And Buffett goes a big step farther. By and large, he says that these so-called experts bring nothing to the party. Whatever they claim to do, you can do better for yourself.

    For obvious reasons, professional investors want you to think otherwise. They foster the belief that stock market investing is too complicated for the average person because that’s good for their business. How long would they last if the average investor decided that they bring nothing to the party?

    Maybe you have a hard time believing that all these experts whom you see on TV and hear on the radio don’t actually add value. If so, you should consider how these professionals earn their income and what financial incentives govern their behavior. Financial professionals frequently are salespeople peddling investment products from which they derive financial benefit. A broker’s income often is based on activity—commissions made through the buying and selling of shares.

    Logically, then, brokers usually don’t earn income when their clients hold stocks long term, which is a central tenet of Buffett’s philosophy. Activity is often a broker’s foremost concern. Brokers get paid based on the number of trades an investor makes, regardless of whether the investments are wise moves or ill-advised.

    When approached by an investment advisor or other financial expert, ask, What’s in it for them? If their answer is not satisfactory, walk away.

    By embracing Buffett’s simple and proven ideas, you can dispense with the professional services of brokers, Wall Street pundits, computer stock-picking programs, market forecasters, and other self-appointed experts. You can make your own investment decisions. The people in most professions, Buffett acknowledges, add value beyond what the layperson can hope to achieve. Not so, he says, collectively in the field of money management.

    Why? Well, most professionals ignore Buffett’s basic philosophy and instead use complex investment practices of dubious utility. This, too, is understandable. Many of these financial professionals have had sustained (and expensive) educations, which have provided them with all sorts of exotic tools and techniques. As the old saying goes, give a kid a hammer and everything starts to look like a nail.

    To be fair, most financial professionals certainly believe in their particular formulas and practices, which they have worked long and hard to master. Unfortunately, many of these professionals continue to ignore the practice of value investing, the technique pioneered a half-century ago by Benjamin Graham and Dave Dodd in Security Analysis and endorsed for almost four decades by Warren Buffett. Value investing consists chiefly of acting on discrepancies between price and value in the stock market: the figurative search for dollar bills that are selling for 40 cents.

    Become a value investor. It’s proven to be

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