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Warren Buffets 4 Timeless Rules of Investing in Stock Market

Updated on September 28, 2014

Billionaire Warren Buffet

Billionaire Warren Buffet
Billionaire Warren Buffet

Welcome to another series of my Warren Buffet hubs. In this hub, I wanted to show you four rules Buffet uses to select his stocks. The rules may sound simple, but they are complex. I therefore will try to keep it simple so you can understand and apply the rules to your investment.

Many people say that Warren Buffet’s investment techniques are complex. Most see his techniques as confusing and something that needs super doper financial IQ to do. I have studied Buffets investment techniques vigorously and even use his techniques and advocate Buffet's value investment techniques. I have personally found Buffet's value investment techniques to be very rewarding for me.

If you are very serious about investing like Warren Buffet with margin of safety that protects your investment, I highly recommend you you to read this books by Warren Buffet, Benjamin Graham and David Dodds and other big names on stock market.

Highly recommended investing books

These books Have become pillars of investment. Please find a copy and not only read it but study it. Studying the ways Warren Buffet and other investment gurus do will guide you growth your wealth in stock market.

1. Security Analysis by Benjamin Graham and David Dodd

2. Intelligent Investor by Benjamin Graham

3. Up on Wall Street by Peter Lynch

Warren Buffets 4 Timeless Rules of Investing in Stock Market

Listed below are 4 strategies that Warren Buffet uses.

Strategy 1: A Stock Must Be Stable and Understandable

Strategy 2: A Stock Must Be Managed by Vigilant Leadership

Strategy 3: A Stock Must Have Long-Term Prospects

Strategy 4: A Stock Must Be Undervalued

Warren Buffet documentary

Strategy 1: A Stock Must Be Stable and Understandable Article Source

Warren Buffet will never buy stock which he says he doesn't know how that company makes money and above stable in its profit generation. This goes to explain why Warren Buffet jump for technology stocks.

This may be against what many people think but Buffet heavily relies on stable companies because they allow him to accurately predict the future cash flows of the business.

At the end of the day, Warren Buffett buys companies that he believes are trading for less than what they are worth.

Strategy 2: A Stock Must Be Managed by Vigilant Leadership

Warren Buffet will always buy a stock that is managed by vigilant Leaders.

Vigilant leaders are those who make a practice of being abundantly alert and deeply curious so that they can detect, and act on, the earliest signs of threat or opportunity. They seek to nurture equally vigilant employees by modeling such behavior and by providing incentives for managers to look for — and interpret — weak signals.

This is a very important tenant for Buffet because he's of the opinion that vigilant leadership is managed by people that avoid excessive debt.

Warren Buffet looks especial at the debt to equity ratio of a company. Again this adds to stability and ultimately predictable future cash flows.

Strategy 3: A Stock Must Have Long-Term Prospects

The third important criteria Warren Buffet use to select his stocks is to pick stocks that have long term prospects. He takes the company whose stock he wants to buy. He then tears the business apart down to its core business fundamentals to determine where he should by or not. There's a reason Buffett says to be fearful when others are greedy and greedy when others are fearful.

Strategy 4: A Stock Must Be Undervalued

Another key criteria Warren Buffet uses to select his stocks is finding undervalued stocks and buying it. I guess this is the most tricky part. I have over the years tried to master this technique and with some bit of luck, I did. I even teach the techniques now. The technical term to describe this process is called Security Analysis. Detail discussion can be found in Benjamin Graham and David Dodds book Security Analysis. You can also consider Benjamin Graham's other book The Intelligent Investor.

Buffett is well known for using an intrinsic value formula to calculate the value of his stock picks. For novices this might be a little hard starting out. In short form, Buffett values businesses by estimating how much the company will continue to earn into the future. After this estimation is complete, he then discounts that future cash flow by a reasonable discount rate. This difficult task is practiced by few and attempted by many.

If you are new to stock market, here's your guide from billionaire Warren Buffet

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Quick recap

What did we cover? Well! We covered billionaire Warren Buffet's four rules of investing and here they are;

1. Stock must be stable

2. Stock must be managed by vigilant leader

3. Stock must have long term prospect

4. Stock must be undervalued

I hope you learnt something. Please comment below to let me know about your thoughts.

© 2014 Ian D Hetri


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