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Monday, January 08, 2007

Warren Buffett's investment principles

I have been always looking for opportunities to multiply my income source. In fact, my target is to increase my passive income to prepare myself for earlier and better retirement. *_*... I am sure that it is the dream for many of you too. Thus, I would like to share with you some useful information on investment(one of the good vehicles to increase the money value)that I have learnt from one of the smartest person on earth - Warren Buffett.

Warren Buffett, the ‘Sage of Omaha', is generally considered to be the world’s most successful investor. His investment vehicle, Berkshire Hathaway, is legendary. The company, originally a textile company and an insurance company at the later stage, has become one of the world’s most successful investment stories through the investment wisdom and astute management of its managers.

I started knowing this big name couples of years back. Since then, I have been exploring different resources to know the secret of his success - to know how he became America’s second or third richest man, and a living legend.

According to Warren Buffett's investment principle, stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business.

There are few important factor this titan looks at before investing in a business. These can be summed up as below:

1. The company should be soundly managed. Tests of good management include:
- Share buybacks
- Good use of retained earnings
- Sticking to what you know

2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
- Company growth
- Dealing with inflation
- Capital expenditure
- Look through earnings
- Brand names

3. The company should have consistently high returns. Warren Buffett would look at both:
- Returns on equity
- Returns on capital

4. The company should have a prudent approach to debt.

5. The businesses of the company should be simple and the investor should have an understanding of the company.

6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
- Price/earnings ratios
- Earnings and Dividend yields
- Book value
- Comparative rates of return

7. Last but not the least, investors need to take a long term approach - value investing!

Hopefully this brief sharings is useful for you. For those who are interested in knowing more about Buffett principles in investment, recommend you this book - The book not only serves as a useful guide to understanding how Buffett invests, it's an excellent primer to investing in stocks too.

Where as for those who want to explore more on the general knowledge of money, finanace and investment, this is a great book for you - It illustrate concepts of stocks, bonds, mutual funds, futures and options, spotting trends and evaluating companies in a very interesting and lively approach!

If you have any better idea on investment and ways of earning passive income, do feel free to drop your comments here!! You are highly wanted! *_*

Thinking of getting other investment books? Do drop by my Life Gallery for the great collections!!


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