We often heard about stock trading, stocks market, buy low sell high, high-risk high return, true? What are the 8 Ways on How To Trade Like Warren Buffett?
Value investing is not DAILY trading by looking at the stock market everyday. Value investors do not trade stocks base on financial advisers or brokers’ advice.
Instead of doing all the above, we learn to be a value investor.
1. What Is Value Investing?
Value investing is a method that choosing the strong fundamental and profitable stocks, at their current intrinsic or book value. It means the stock price is cheaper than the actual overall business values.
As the economy and market overreacted most of the time on a daily basis to the news. It has no direct impact on a company’s fundamentals in the long run.
2. How To Trade Like Warren Buffett?
They constantly looking for undervalued stocks that have:
- good cash flows
- good fundamentals
- have economic moats
- sustainable competitive advantages such as the brand
- network effects
- switching costs
Economic Moats play an important role. Buffett prefers to understand the business, companies like Coca-Cola, insurance, banking companies like Wells Fargo. He also looks into sectors like healthcare, industrial and energy.
“It is much better to buy a wonderful company at a fair price, than a fair company at a wonderful price,” –Warren Buffett
For example, Coca-Cola, a well-known brand that being tied-up with Mcdonald’s, these two well-known F&B are most customers favorite.
Warren Buffett recommended investing only in industries you can understand. Like, computers, cars, clothes, appliances, and food.
3. How does Value Investing Strategy work?
The simple concept of value investing is pretty much the same. Stocks are good in value, we will wait for the right price to buy.
Stock market fluctuations will not change the way the business fundamentals of companies.
Often times, stock markets go on sale usually no prior notice. As value investors, we read more, retrieve info to buy good company stocks at a sensible price. Continue to do long-term investment and be patient, we will be able to grow our money exponentially.
4. Intrinsic Value
When is the discounted price? How cheap is cheap? When shares are undervalued? Investors use various metrics to evaluate the intrinsic value of a stock.
Value Investing starts from the fundamental of a company. We look into their financial status, yearly revenue, earnings per share, how healthy is their cash flow.
It might sound a very difficult process, Mcdonald’s, Coke-cola and Starbucks, aren’t they just part of our daily life? No matter what economic situation we are at, we still consume the same fast food and coffee. That’s the basic knowledge or general information that we need to obtain.
There are various metrics you can use that include:
- The book value measures the value of a company’s assets and comparing them to the stock price. When the stock price is lower than the value of the assets, the business is undervalued.
- This is the ratio of a company’s stock price to the company’s earnings per share. It is used to find out whether they are overvalued or undervalued.
- Cash generated from the business after the costs of expenditures and operation costs have been deducted. The free cash flow usage is to invest in other businesses. Like acquisition, and expansions, pay off bank debt, pay dividends and issue share buybacks from shareholders.
5. Don’t Follow The Hearsay
Most of the time people invest in the market when the market is doing well, and they sell when the market is going down.
Most people have no patience to wait for the stock price to do up again in the long run.
When many are buying in (hopeful), true investors are often exiting the market or not doing anything. When everyone is selling (fearful), investors are buying and keeping whatever stocks that they have for long term investment.
Regardless of the news, what are the people saying, only focus on the company fundamental, the hidden part of the iceberg. This is the must-learn way of how To Trade Like Warren Buffett.
One of Warren Buffett’s most famous investment sayings is “Be fearful when others are greedy. Be greedy when others are fearful.”
After 7 years of value investing in the stock market, it was not an all-time-winning investment. I made the aforementioned mistakes in 2016 by putting many eggs in the same basket, acted based on hearsay.
Diversification is important to protect your portfolio. Owning multiple stocks from different indexes, a variety of companies and explore into different sectors, to safeguard your money.
Investment manager Christopher H. Browne recommends owning 10 stocks in his portfolio. Whereby value investor Benjamin Graham suggested 10 to 30 companies are enough to create a diversified portfolio.
7. Observe Your Emotions
You will encounter a dilemma whether to keep holding it or to take the profit and sell them.
Vice versa, when the market has plunged, start observing your emotions, you might not able to sleep well at night. All these will happen to all of us and it is normal.
This is the time we all should observe how we feel, and perhaps read this blog again and again. Why being a long term value investor is important, diversification is mandatory, not to be herd-mentality investors.
Build your confidence by doing more readings and research.
8. Long-term Investors are The Winners
Past records, those bought the stocks 10 years ago and leave it there doing nothing made the most profit. They only sell it when they need the money for retirement. Otherwise, the periodical up and down is cyclical.
Warren Buffett once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day, and not reopen it for five years.”
- Choose the good and profitable stocks that is less than their current intrinsic or book value.
- Economic moats, do what you can understand
- Metrics to find out value stocks include: Price-to-book (P/B), Price-to-earnings (P/E) ratio, Free Cash Flow
- Don’t follow the hearsay
- Observe your emotions
- Be a long-term value investor
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