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Billionaire Warren Buffet’s 3 Stock Selection Methodologies

Updated on September 28, 2014
Billionaire Warren Buffet
Billionaire Warren Buffet

Why is it that people can grow up in the same country, have the same opportunities, even be from the same family, go to similar schools and live in the same economy- yet some excel and outperform financially, while others, often equally capable and intelligent, fail miserably in life?

My desire to always learn and improve led me to study and observe arguably the world’s most successful investor of all time - Warren Buffett, dubbed the Oracle of Omaha, an investor with an incredible and almost uncanny ability to recognize hidden value and opportunities in businesses that others often lack.

If you asked me whose method should I use to select stock, had I not any idea on stock selection, I would rather use Warren Buffet’s or George Soro’s methods. Why? Because they keep winning time and again proving that their methods are worth the price to follow. They do lose from time to time but because they know you can never always win or always loss on the market, they try as much as possible to minimize their loss and maximize gain using effective strategies.

Warren Buffet’s method has become foundation for my business and investment decisions. I personally use Warren Buffett's share selection methodology - he has three basic criteria that I will soon discuss:

Selecting the right share for investment is no different in principle to identifying the right company to purchase as a business investment or a property purchase as part of a property investment portfolio. An astute investor will treat share investing as a business. You can find lot of these in Jamie McIntyre’s book What I Didn’t Learn in School but Wish I Did.

Method # 1: Never buy a company that is not making profit

You earn dividends or make capital gains when company whose share you have purchases makes profit. All other factor is minor. The company may look too good on the outside but if it is not making profit, how do you expect to profit from that company’s shares? Warren never buys a company that's not making profit. Sounds simplistic but how many people buy a share on a hot tip and never check if it's a profitable company?

Method # 2: Never buys a company if he doesn't understand how it makes its money.

No one, even the so call experts can predict future of a company that is listed on any stock exchanges around the world. However, knowing how a company makes money helps a lot in predicting their likely future. I can prove this with examples that follow. During the boom that eventually became crash. Warren Buffet was criticized for not buying Enron shares. Critics said Buffet is old school, is losing his marbles, he simply doesn't understand the future, all because he refused to invest in dot com companies despite their share prices going from a few cents to up to $100 or more in less than a year.

Buffet gave a simple answer to his critics. He didn’t buy because he didn’t understand how they made money. Buffet stuck to his fundamentals and proved all his critics wrong. My belief is if it works for Buffet it works for me.

Method # 3. Never buy a company is overvalued

Many consider that this method works for Buffet as he usually is buying the entire company, nevertheless, it is still good advice. But ideally he is looking for companies the share market is under valuing so that he can get a bargain. Buffett says to look at buying a share as if you were going to buy the entire company.

If you were buying a newsagent, corner store or restaurant you would check if is profitable and check if the accounting is reliable and you would want to understand how it makes its money. Even if it is profitable and you understand how it makes its money and is only worth $250,000 you aren't going to buy it at $300,000. But you would want it at say $200,000 or less, being $50,000 below value. Makes sense?

Buffet sticks to this simple criteria and has consequently become a billionaire. To Buffett, management is everything. He simply won't buy a business or a stock if he doesn't have faith in the executive suite. Indeed, in terms of investment criteria, a strong management team carries a lot of weight. "At headquarters, we're not training managers, we're finding them," explains Munger, who adds that it's pretty easy to identify talent. "If you're standing on Everest, you don't have to be a genius to recognize it's a high mountain."

You can invest on any investment vehicles but the key message here is to buy on value. If you found the hub useful, please share it.

© 2013 Ian D Hetri


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    • Ian Dabasori Hetr profile image

      Ian D Hetri 3 years ago from Papua New Guinea


      Thanks much for coming along and commenting on my hub. Warren is indeed a great thinker and value investor of all time. What a lesson he brings to us all.


    • celebassistant profile image

      Brian Daniel 3 years ago from Los Angeles

      I saw several Warren Buffett documentaries and it's amazing how his mind works. He still lives in the house he bought 30 years ago, and he buys his cars used so he can save money.