This book, “7 Secrets to Investing Like Warren Buffett,” is written by Marry Buffet (Warren Buffet’s former daughter-in-law)and Sean Seah. It is a very good book for beginners who want to start investing. In order to convey Warren Buffett’s methods and investing philosophy to novice investors, Sean and Mary agreed to write “7 Secrets to Investing Like Warren Buffett.” The content in this book is intended to introduce you to Warren Buffett’s financial strategies and assist you in effectively implementing them.
Let’s Start to explore the secrets revealed in this book
Secret-1: Power of Habits
Habits determine who you are, how you conduct yourself, and the outcomes of your efforts. If you are overweight, it’s likely because of improper diet and exercise habits. Most likely, you are not engaging in the proper financial planning if you are broke. People who are truly wealthy have habits that support wealth accumulation. However, many people do not develop powerful habits; instead, they turn to get-rich-quick schemes in the mistaken belief that one successful investment, one jackpot, or one home run can suddenly and permanently alter their financial future.
Haste is waste. Warren once said ” No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”. The Point is, Investment take time. You cannot become rich overnight. You have to adopt habits that make you rich.
Watch your spending
if you cannot control your spending, No matter how much money you have, one day you will broke. This is very important habit to watch your expenses. regularly write them down to make yourself in control. Warren frequently considers an item’s future value after compounding its current cost before making a purchase. How much money would you be able to save and compound over the course of 30 years if you can adopt this way of thinking every time you are about to purchase an unnecessary item of clothing or gadget?
Warren once told his beautiful story, He drove a vintage Volkswagen Beetle for many years. People assumed that he was driving an old automobile because he was cheap even though they knew he could afford a new one. Rather than being offended by their opinion, Warren remarked, “Look—a new car will cost me $20,000. And it won’t be worth anything in 30 years. In actuality, it could not even last 30 years. But if I compound $20,000 a year for ten years, that will be close to $150,000. It will probably increase to $1.5 million in 20 years. And it will be worth $9.9 million in 30 years! $9.99 billion That price for a new car is simply too much!
To the point, Warren said, “You know, most people spend Йrst, and save whatever’s left over. But in fact, what you should do is to save first, and spend whatever you have left.”
Find a job you love
“Take a job that you love. You will jump out of bed in the morning. I think you are out of your mind if you keep taking jobs that you don’t like because you think it will look good on your résumé. Isn’t that a little like saving up sex for your old age?“
Most of people use their up time in Jobs, so finding a good job is very important, which makes you jump out of bed every morning. This will help you keep healthy and wealthy. Job you have is constant depression and leads to many problems in life. so it is utmost important that you do the job that you love.
Avoiding debt is a habit that is both benificial for your financial and mental state. A world without cash is emerging. The use of credit cards has increased recently as a result of technological advancements. There’s no denying that this has given us many conveniences. However, if we do not know how to carefully monitor our expenditures, it could be a double-edged sword. Before using a credit card, keep in mind these two details:
- When we use credit cards and don’t pay the balance in full each month, we are charged very high interest. Warren previously remarked, “Credit card interest rates are really high; they might range from 18% to 20%. I would be bankrupt if I borrowed money at 18% or 20%.
- Using credit cards makes us want to spend more money. When we make purchases with cash, it causes a feeling of loss and causes us to second-guess our choices. Contrarily, cashless transactions, such as those made using credit cards, make payment seem less painful and are perceived as being simpler. People tend to overspend as a result of this comfort.
In order to avoid these problem follow below 2 points
- Pay using cash rather than a credit card. You should use the “Envelope System,” a money management strategy, if you are the type of person who lacks the self-control to restrain your spending. You create different envelopes for various categories of expense. Decide how much you can give to each category next. You may, for instance, have a separate envelope for food, one for travel, and one for personal purchases. It’s time to stop once you’ve used up all of the money you set aside for each area.
- Make regular, full payments on your credit card bills. Make sure you don’t incur any late fees or interest charges if you still want to take use of the ease of credit cards.
Warren frequently quotes his two investment rules. Rule number one is to never lose money. Rule number two is to never forget rule number one.
There are typically two types of people that make lacked the ability to accumulate wealth. People who take a great risk in an effort to become extremely wealthy come first. They take a leap without looking, tumble, and land at the base of the mountain. As an alternative, some people are immobilized by dread and won’t dare to take any chances. They allow infation to gradually deplete their money by keeping their money in the bank or under their mattresses.
Both strategies are wrong. proper risk management is required in order to become rich.
Risk Management Action 1: Emergency Fund.
Emergency fund is amount of money you saved for rainy day. it shoud be minimum 6 times your monthly income. Don’t Invest this amout and it should be easily accessable all the times. it should be kept out of sight but not out of reach.
Risk management Action 2: Ample Insurance
Unless you fall into the ultrarich category, you need to make sure you have insurance. Insurance is a huge topic and it is impossible to cover everything here. at the very least you need insurance to help you manage
these two situations:
1. Loss of income
2. Incurring medical expenses
It is important to make sure that all income earners, and especially people who are the sole breadwinner of the family, have adequate insurance coverage. If you should lose the ability to generate income, the money provided by insurance will help you through the most difficult times. so income loss insurance will save you there.
If you don’t have adequate insurance, medical expenses could wipe out everything that you have accumulated. One might need to sell off investments and businesses, or even take loans to pay for medical bills. Hence Medical insurance will help you to get out of these circumstances.
Secret-2: The Power of Value Investing
Once you have done risk management, you can go ahead for investment. In investment, Value stands for buying a good business at a good price. You may be wondering why some people who have bought shares of proЙtable businesses do not make money from the stock market. The explanation is simple: they bought it at an overvalued price. hat is why it is so crucial to learn value investing, which advocates buying good and profitable businesses at sensible prices. And by practicing value investing you will gradually master the secret to building lasting wealth.
Now Question is how to find business which comply to value investing. Value investement is to purchase business at low price. we will cover these tricks in next sections
Secret-3: Generating Stock Ideas
It is really important to know which areas you should look into before you begin investing. If we try to be good at everything, it is likely that we will end up being mediocre at many things. So write down at least three areas or segments that you think you have a true interest in. Review Stocks of your circle of competence. Find stocks that have
- Profitable Business
- Loyal Customers
- Ahead of trends
- Market Leader
- Good Growth Potential
and in order to find these qualities you can
- Visit shopping malls to see which shops have a lot 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 screeners
Thefirst important step an investor must take is to determine where to invest. Warren calls this the circle of competence. Here is an excerpt from his 1996 letter to Berkshire Hathaway shareholders:
“Should you choose… to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
Now Question is where to find this information. There are many websites available in this context like Yahoo Finance, Investing.com and Seeking Alpha. and for Pakstan Stock Exchange is DPS. Trading View can be used for charting.
Secret-4: Economic Moats
Economic moat is to find the advantage of your selected stock on his competators. as per book
“We often apply the strategy of finding an advantage in the investment world. We try to invest only in businesses that have an advantage over their competitors. Warren BuАett likes to explain this advantage metaphorically, using the analogy of a moat around a castle to ensure you have extra protection. He calls this an Economic Moat.”
To Find out if a business has a durable competitive advantage, answer these Five Questions:
The Five Questions
1. What is the value (products/services) this business is providing?
2. Is this value provided by anyone else?
3. Will I choose to get this value from this business or someone else?
4. Why would I rather get this value from this business instead of others?
5. Is the reason(s) you identiЙed in question four sustainable in the long run?
Secret-5: Language of Business
You must read the financial statement of company before purchasing its stocks. Check its profit, EPS and liabilities. There are two key things we look at in a company’s balance sheet:
1. Is the equity (also known as book value) growing over the years?
2. Does the business have high debt? This is determined by looking at the current debt-to-equity ratio.
Below video is the baic idea of how to do fundamental analysis of stock
Below table is provided in book for selection of stocks
Valuation is how you choose the stock. below are some parameters that are used to do the valuation
PBR: Price to Book Ratio (PBR) is one of the best parameter to valuate the comapany. it is determined by dividing the stock price per share by the book value per share of the company (BVPS). Companies determine an asset’s book value by netting it off against the asset’s overall average depreciation. Book value is the same as an asset’s carrying on the balance sheet.
PE Ratio: The price-to-earnings ratio is another tool that is often used to determine if a company offers good value to investors. Here, instead of valuing a company based on its asset value, we look at it based on its earnings ability, its price to earnings (PE Ratio).
EPS: EPS, simply put, is the total proЙt of a company divided by its number of outstanding shares. To calculate book value per share, we look for the earnings each share is entitled to, rather than the book value.
Dividend Yeild: it is profit sharing by Companies at their annual or Quaterly Profit.
Growth Formula: V = EPS x (8.5 + 2g)
V is the intrinsic value;
EPS is the latest earnings per share;
8.5 is the assigned PE ratio of a stock with 0% growth rate; and
g is the expected growth rate for the next 10 years.
Secret-7: Portfolio Management
Below are some rules defined by warren buffet for your portfolio Management. Portfolio Management is how you Manage your stocks or investments
Rule 1: Start with funds allocation. At any point in time, decide how much money goes into investments and how much is set aside as cash for future investment opportunities. This really depends on your assessment of how expensive the market is at a given moment and how likely it is that a correction will happen soon. Typically, you should cast aside your own personal preferences and assess the economy objectively, as you would assess a company.
Rule 2: Never put more than 10% in any stock. According to this rule, your portfolio should probably contain 15 to 20 stocks. “Wait a minute,” you may ask, “shouldn’t I have only 10 stocks since I will invest 10% into each stock? The rule is that your maximum investment in each stock should
be 10%. And you should only commit the full 10% into those stocks that you have very high conЙdence in. This leads us to our next rule.
Rule 3: Stronger stocks, higher weight. As we build up a list of stocks that we would like to purchase, it’s a good idea to rank them in terms of how conЙdent we are in their prospects. If we have a list of 20 stocks we want to purchase, we are bound to be more conЙdent in some rather than others. You can either rank them from 1 to 20, or you can group them into bands or grades—e.g., grade A, grade B.
Rule 4: Review your portfolio at least once a year. A commonly asked question is “How often do we monitor or review our portfolio?” Our suggestion is at least once a year.Companies listed on the stock exchange will issue their annual reports every year. Since these companies report on a Quarterly basis as well, it may be a good idea to read through their quarterly reports to see how well they are doing. Typically, we will need to take note of any special situations and any news that the company announces that is out of the ordinary. If that happens, we have to ask ourselves if we still want to keep that stock. This leads us to our last point.
Rule 5: Do not sell purely based on price. By this time, many investors will be asking, “When do I sell? What if the stock price rises or drops significantly?” The answer to that question is to never base your decision to sell purely on price. When we buy a business, we want to look at it as if we were employing this business to work for us in our portfolio. So the question will be “When do we terminate the services of this employee?” The answer will be “If this employee is no longer a good employee.” This means that we should review the business’s performance together with its stock price.
Trick of Trade:Suppose you bought a stock and the price dropped by 20%. You should not be in a hurry to sell it. Instead, you review the performance of the business. If the fundamentals have declined and you have lost conЙdence in the business, then you can sell it oА. But if the long-term fundamentals are still great, you should not sell; in fact, you might consider buying more of that stock.
Another scenario will be if the stock price suddenly increases significantly. There may be a temptation to sell oА the stock and capture proЙts. Don’t be in a hurry to do this and make the mistake of selling oА stocks too early. What should you do? You should review the business performance and
revaluate the price based on the valuation methods discussed earlier in this book. If the business is performing well, you may not want to sell the stock because, based on the new valuation, it may be considered undervalued. In fact, you might choose to buy more of it.
Here are the Five steps you should follow in order to put what you have
learned into practice:
1. Pay yourself Йrst.
2. Save up for an emergency fund.
3. Get insurance.
4. Clear your debts.
5. Invest and compound
I hope you have enjoyed this summary. this is my favourite book on investing. i have also given a my personal stock selection criteria here. Please feel free to comment and give advice to make this blog more better for readers. Happy Investing!!!!