8 Ways on How To Trade Like Warren Buffett

How To Trade Like Warren Buffett?

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?

Value investing strategy is known to be Warren Buffett’s way, and investors like Benjamin Graham, professor, mentor of 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:

Price-to-book (P/B)

  • 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.

Price-to-earnings (P/E) ratio

  • 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.

Free Cash Flow

  • 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.”

6. Diversifying

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.”

Takeaways:

  • 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
  • Diversification
  • Observe your emotions
  • Be a long-term value investor

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Please leave me some comments about “How to trade like Warren Buffett” and feel free to discuss further more!

14 Comments

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  2. Wow! You have done full detailed analysis into what value investing strategy is. The goal is to buy it low from the usual normal price and sell it high above its normal price it at he normal value. Considering the way Buffet does it, going long term with  the stocks before cashing in or the getting the dividends on them. To be honest, value investing strategy is the best possible kind of investing and you have broken it to understandable bits for anyone to understand. Thanks.
    i will surely bookmark this because I know it would be of great value to me soon

    • Great that my post has helped you a certain extent.Perhaps more people can do value investing to grow our wealth, make our money to work hard and beat inflation in the long run. Glad that you like the info.

  3. Great article on value investing. That’s the method that got me started into the stock market as well. I really like Warren Buffett’s way of thinking with this strategy. Benjamin Graham certainly has gotten a lot of things right too. In fact, my favorite book on investing is The Intelligent Investor by Benjamin Graham. It’s a great book on value investing. My favorite quote about value investing is that “Behind every single stock, there is a company” and that stocks aren’t just symbols with prices that go up and down. Way too many people think about stocks like gambling. Putting money in and hoping some comes out; but really it is investing into a company. One can win in the stock market with the right knowledge and research, and this is a great post detailing the beginnings.

    • Ya totally agree. When most people think the stock market is too risky, most likely they betting on the company. It’s always better to know what we buy and why we buy, the risk has cut down a lot if not at least half. I came across the same book too from Graham. Love it. Hopefully, the post explains well and more people can gain more knowledge about the stock market and make some money. thanks for dropping by.

  4. Thank you for this informative post.  I’m actually on a financial rebuild if you will; just paid off $30k in debt, started savings and money market accounts and am looking at some very basic, low-investment, angel investing just for fun.

    I am unfamiliar with value investing but it’s seems intriguing.  That said, I’m a man so maybe finding the best deal/sale will be more difficult for me.

    Is there a group or company you’d recommend to purchase and manage value investments for me?

    Thanks again,

         Scott

    • HI Scott, there are a lot of finance companies that can claim that they are good at handling our money for us, but the problem is they always ended up as scams. I not saying all are, but most of the time if we park money for someone else to manage our money for us, is not their money, when they lose our money, who cares the most? We are. We will label them as a scam when our money is not coming back. I suggest to learn all kind of investment by ourselves and manage our own money. Nobody else will care more. Thus, in the future please invest diligently! All the best!

  5. Value investing sounds really good. A friend has told me about value investing and from you have penned, I believe it to be a very good way to make good money from the stocks. This strategy according to what I have learnt here is buying sticks that have great potential but are priced low and so when their prices go back high,that’s where the profit ones in. It is a very good investing idea honestly and I want to give it a try. I want to learn more on this investing so I’m getting to that course

    • Hi John, the course will definitely help you to gain more knowledge about value investing! All the best! thanks for dropping by!

  6. The value investing strategy is a really great  strategy that has been effective in the industry over the years, thus this review is really important and helpful. I have always heard about this strategy but haven’t had enough knowledge on it. I’m grateful for this post for carefully listing and explaining the 7 metrics well to my understanding. I’m grateful for this value adding review and I hope to see more of it.

  7. I’ve heard many good things about value investing and Warren Buffet. He seems like he’s a master at this sort of thing. Placing value on item not knowing if it will have value in the future can be a risky venture. But I like how you have explained it in this post. 

    I would like to be able to purchase shares, but find they are really tough for a laymen person like me to figure out. What are you placing value on right now? Where do you see the stock going up?

    • HI Jagi, thanks for dropping by. Like I mentioned in the post, it is only risky when we don’t know about the company and if we are trading for short term gain. I can’t speculate the stock market trend now, but I’m confident about stocks like MCD, SBUX, V, NKE, KO, and DIS. These are the very strong fundamental stocks, strong business model, and sustainable during the economy crisis and pick up fast after crisis 🙂 We don’t have to invest in companies that are new, we can always look into the companies with the past 10 years financial record. Hope ti helps!

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