Everyone wants to be good at investing, but they don’t usually know how to go about it. That is precisely what we will be discussing in this blog today. I will be showing you exactly how to invest like an expert. Warren Buffett is a great investor and there are certain things he looks at; he also uses some strategies which I will be explaining here.
You are welcome to another edition of my regular blog, and you are going to benefit from this blog. Keep watching till the end. You can also check out related blogs like “Investing advice from the greatest investor.” If you are yet to subscribe, please do so. Let’s go deeper into our discussion on how Warren Buffett makes his investment. We will be discussing what he does and how he goes about making his investment.
What Warren Buffett doesn’t invest in?
Everyone knows who Warren Buffett is; he is one of the most successful investors globally; he is a billionaire American investor. His net worth is over $84.8billion. The billionaire investor doesn’t invest his money into commodities. Or any form of alternative investment.
It is rare to see Warren Buffett invest in real estate; He simply does not like investing in properties. Billionaire investor Warren Buffett doesn’t own any real estate investment. It will surprise you to know that he only owns a home in Omaha. The only real estate firm owned by Warren Buffett is now the nation’s largest “Home services .” He doesn’t own 100 properties all over the world. However, he owns a few firms, which doesn’t change the fact that he doesn’t hold many properties. Are you surprised? I know by now, you will be asking, what does he now put his money into? Relax, I will tell you.
What does Warren Buffett do with his money?
What the billionaire investor wants is quite different. He is more interested in using his money to acquire assets. His money is his income, and an asset is what he wants to acquire. Now, let me ask you, how do you think income makes room for more assets? He is more interested in his income’s ability to generate consistent and stable assets over time.
An example of an income-generating asset is an investment and businesses. I know someone will want to ask me how real estate isn’t an asset. Of course, real estate is an asset, but when we discuss how Warren Buffett goes about his investment, it takes real estate out of the picture. If you run a profitable business, it will bring in recurring revenue for you.
Warren Buffett gets his money involved in businesses, the money he is generating from the business goes automatically into his company “Berkshire Hathaway”. Isn’t that impressive? Warren Buffett does buy stocks, and when he does, he is buying ownership stake. That is precisely what he is doing. When you own stock in a given company, your stake is the percentage of the stock you own; When Warren Buffett buys a stock, he buys an ownership stake generally between 5% -10% of the company.
He is a very organized and strategic investor, do you know why I said so? Let me explain, he puts his money in businesses, he earns and invests it in Berkshire Hathaway, whatever he gets, he invests in more businesses. If you observe closely, most of the stock he invests in are dividend payers, and the good path is the dividend he received is going back into his Berkshire Hathaway. The billionaire is interested in investing in two things, which are profitable businesses and also stock. That is the simple way he builds his profit and net worth.
I know someone is asking how he makes so much money from his stock investment. It is indeed the right question to ask because Warren Buffett rarely losses cash on the stock exchange. You, as an ordinary investor, it is much more possible that you are always affected by any movement that takes place in the stock market. Still, surprisingly Warren Buffett doesn’t seem to be shaken by all this.
How Warren Buffett earns so much from stock
It is time for us to look at the billionaire’s portfolio. How does he do all this? When Buffett invests in stock, what is he trying to do? What is he looking out for? Warren Buffett doesn’t joke about investment in stocks, and he always takes much of his time to calculate the risk involved. He is not investing in a company to play around with, and he is doing so with an expectation to earn a massive return on investment. He tries as much as possible to avoid companies that will make him hit a loss. You, as an investor, do you comprehensively put this into consideration as he does? No, right?
Every company has a financial statement; the company’s assets, liabilities, total debt, equity capital, and the rest is what makes up the balance sheet. As a billionaire that Buffett is, he wouldn’t want to invest in a company he knows nothing about the financial position. He goes entirely into buying a company stock after understanding what the company owns and owes. He checks out for the income-generating assets, a positive cash flow, the company’s working capital, and the capital structure as well. He isn’t just successful, and he always ensures he does the necessary things that need to be done.
A good company should have low or no debt, and you don’t expect Warren Buffett to buy stock in a company that is highly in debt; it is impossible. How is a company high in debt thinking of making a profit? No business can survive without making a profit, so why waste your time and resources? Profitability is key in any business.
Warren Buffett doesn’t risk buying stock with a no-profit company because he knows it has a high-risk level. He never makes himself vulnerable in any way. It would help if one can learn from the successful investor Warren Buffett.
The billionaire investor Warren Buffett doesn’t invest in a company whose market capitalization is less than $10 billion. Are you surprised? Market capitalization has to do with the market value of the company he is buying the stock. Market Capitalization is commonly called “market cap.” The only way through which you can understand the size of a company is through the market cap. Market Capitalization is the entire company’s outstanding shares multiplied by the present price of a share. Buffet investing in a company with over $10 billion cap means he deals with only a well-established company, not a company that is barely trying to survive. You hardly see him lose money because he buys his stocks, and he plays the investment game with strategy.
Warren Buffett buys stock once he sees a good value in the stock; he is more concerned about “Value.” He is never in a position where he is desperate to buy stock. This is more reason you should take your time to understand a company before buying stock; it is essential to carry out thorough background research.
WB will not buy stock in a company that doesn’t give him a dividend. At the beginning of this blog, I already mentioned how he makes perfect use of the dividend he acquired from his stock investment. Buffett needs that regular payment coming from the company he buys his stock. Think about it, and if you are to buy shares in a company, apart from the shares price going up over time, and you selling it to make more money, you should be able also to earn a dividend;
How does Warren Buffett manage his portfolio?
Warren Buffett manages his portfolio by investing in a company with a strong competitive advantage. He looks out for things that make the company stand out from the rest before buying stock in such a company; this is Known as Moat. There are several ways through which a company can build a strong moat; these include; Branding and achieving economic scale. Let’s take Google; for example, the company has a strong moat by developing a better algorithm for searching the internet.
Warren Buffett is looking out for a company with the ability to maintain a competitive advantage over its competitors to protect its long term profit. Let’s assume you own a castle full of riches; there will be a need to protect your wealth by looking for a way to build something that performs the function of a barrier, making it impossible for the outside forces to come into the castle.
Check out companies like Coca-Cola; it has a massive moat, that is why you will see Buffett investing in such companies. There is no company without a competitor, but your ability to make your company stand out from the crowd is what is essential. You wouldn’t want a situation whereby you can’t make a profit from your stock, and this is more reason you should invest in a company with a good profit and a great balance sheet just like the most significant investor does.
He manages his portfolio by investing in different companies. He buys stocks in companies like; Renewable energy, Apple, the Banking sector, Electric companies, and B2B companies ain’t left out of the investment. All the companies Buffett invests in are ones that he understands and he is confident that they will keep doing massively well over the years. A company like Apple has a good moat, and also the company pays him a dividend.
Another most critical factor Buffett takes into consideration is his confidence. Most investors usually neglect the importance of confidence before investment. When you want to invest as the billionaire does, you can’t work with the “maybe” mindset. It is essential to understand everything about a company before making any investment. The only way to understand a company comprehensively is by carrying out well-detailed research about the company
Warren Buffett doesn’t just go about investing in the stock he thinks will go up with time. Everything is about mindset; it is not what you think; when it comes to investing, it is what you know. Warren Buffett goes for value, and it would be best if you do that. Buy shares in a company with good value, refuse to be desperate. Go ahead and grab opportunities, but do so after you have done your calculations. You can as well practice diversification; that is a way Warren Buffett manages his portfolio. It would be best if you don’t put all you have into a company. Remember, it is better to be safe than sorry.
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© Lifestyle Tips by Antoaneta
Recommended for further reading:
- Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage
- The Warren Buffett Way
- The Snowball: Warren Buffett and the Business of Life
- The Financial Times Guide to Investing: The Definitive Companion to Investment and the Financial Markets: The Definitive Companion to Investment and the Financial Markets
- Stock Market Investing For Beginners: The Investment Guide – How to benefit from the crisis, invest in stocks and generate long-term passive income incl. ETF and Stock Picking Checklist
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