Stock Selection.. Warren Buffett way… Part 1

 

Lehman Brothers Rockefeller centre

Lehman Brothers Rockefeller centre (Photo credit: Wikipedia)

 

There is much written and spoken about Warren Buffett and his success as an investor. No doubt Buffett is most successful, respected and worlds greatest investor in today’s time.

 

Whenever I look at successful people, I feel curious about what is that these people do, which others (majority) didn’t. Though there are many other successful investors in world, but the elements of Buffett’s philosophy is something which has always inspired me. If you study Buffett’s stock selection philosophy you find a sense of simplicity, lot of patience and discipline in them. I believe this sense of simplicity, patience and discipline is the only thing which makes him different from others.

 

I will summarize some of the elements of his philosophy and try to emulate this for stock selection in Indian Market. I am not sure how many stocks would be shortlisted by this process, but I will try to select at least 10 stocks derived from Buffet’s philosophy. Once identified, I will create a dummy Portfolio in Moneycontrol site and track them for their performance. ( I wish I had enough money to actually Invest some in this portfolio).

 

Warren Buffett follows a value investing strategy that is an adaptation of Benjamin Graham’s approach. Buffett seeks to acquire great companies trading at a discount to their intrinsic value, and to hold them for a long time. Buffett has always insisted on understanding the business and margin of safety. He says, that if you do not understand the business, do not take a position in the stock. Buffett stated “We want businesses to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price.”

 

Let us try to explore this more by seeing what he has done and what he has not done.

 

1. He prefers to invest in businesses, which manufacture products that people can’t or don’t want to live without, such as toothpaste, soaps, soft drinks, cars and computers.

 

2. The companies that are given to speculation or hype are often disregarded.

 

3. Buffett’s primary concerns includes –

 

3.1 a company’s financial stability, quality of management and simplicity of business.

 

3.2 Ability of company to pass on its cost to customers. He believes that a company should be able to adjust its prices to inflation because it enables it to make profits in varying economic climates.

 

3.3 The enduring moat – USP of company, i.e, one critical quality that its competitors can’t overtake, regardless of money they are willing to spend.

 

3.4 Save Cash , be liquid – Buffett says that he has learned habit of saving from his grandfather and states”Cash cushions you in bad times and gives you chance to buy aggressively when others are down”. Buffett and his company follow this message religiously. He either keeps cash or buys US Treasury Bills. This helped his firm after Lehman Brothers collapsed.

 

To be Continued..

 


 

Disclaimer: This post is inspired from various news items published in financial daily The Economic Times, online portal Rediff Business and also inspired from the book titled The Guru Investor by John P. Reese, published by John Wiley & Sons, Inc. Author suggest the reader to do their own due-diligence before they apply any of the methods presented here in investing. This article is only for educational purpose and does not endorse the suggested methodology as the only and most appropriate way of investing.

 

 

 

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About Retvic Bisaria
Hi, I am Retvic Bisaria, a finance professional working for an US based IT offshoring and Outsourcing company. Besides a finance professional, I am a photography enthusiast and love visiting places.

One Response to Stock Selection.. Warren Buffett way… Part 1

  1. Ankur says:

    interesting .. will definitely follow part 2.. 🙂

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