7 Secrets to Investing Like Warren Buffet

I am glad that I got the opportunity to read this book 7 Secrets to Investing Like Warren Buffet authored by Mary Buffet and Sean Shah. This book, originally published in 2019, is a simple guide for beginners in investing. You can buy the book directly from Amazon – Buy Now

It is divided into 7 parts which explain the 7 broad secrets to investing like Warren Buffet.

1. The Power of Habits

This part focuses on the basic discipline and habits which a person should cultivate to become truly wealthy – E.g., saving first and spending the rest, finding a job that one is enthusiastic about, avoiding debt.

According to Warren Buffet, there are two investment rules.

The book speaks about risk management which is very much relevant in the pandemic situation, like maintaining an emergency fund of a minimum of three months’ worth of living expenses.

Another crucial aspect that is insisted upon is the need for insurance to manage at least the loss of income and medical expenses

2. The Power of Value Investing

“Having a collection of the most profitable businesses in the world” is what investment is all about. In the stock market, we can own these businesses by buying their shares.

The book emphasizes the importance of practising value investing, which means buying good and profitable businesses at sensible prices. It explains how to use value investing to make our money grow.

3. Generating Stock Ideas

The book suggests practical ideas while investing in shares like selecting businesses we are familiar with, following financial websites, tracking the richest people and their portfolios, and looking for companies with a  good work culture.

Warren Buffet has said that he prefers looking for stocks in Main Street rather than Wall Street, meaning that he is a customer of these businesses whose shares he invests in.

It is vital to invest in stocks which is within our circle of competence

4. Economic Moats

It is necessary  to invest only in businesses that have an advantage over competitors. This makes businesses consistently attract and retain customers. E.g. of, such advantages include Branding, Economies of scale.

5. Language of Business

Accounting is the language of business. It is essential to understand the financial statements, i.e., Balance Sheet, Income Statement, Cash flow statement, to assess businesses for investments.

Some of the investment checklists to observe from Financials are

6. Valuation

The ability to value investments is the core skill of any value investor. The key idea of value investing is to purchase an investment for less than it’s true value.

The different valuation methods are

1. Net current asset value
2. Net Asset Value / Book value/ Equity/ Net worth
3. Valuation based on Price Earnings ratio- Based on Earnings      ability rather than asset value
4. Based on Dividend Yield
5. Growth model

* Formulas given at the end of the review

7. Portfolio Management Rules

It speaks about the importance of diversifying our investments to manage risk.

1. Start with funds allocation
2. Never put more than 10% in any stock
3. Stronger stocks, greater weightage
4. Review the portfolio at least once a year
5. Do not sell business purely based on price-review business      performance along with stock price.

 MINDSET OF A SUCCESSFUL INVESTOR

Following characteristics are required for a successful investor

1. Patience
2. Independent thinking
3. Focus
4. Consistency

CONCLUSION

Thus, this book guides a beginner investor to understand value investing and make informed decisions. Even a person from non -finance background can read it, as basic concepts like assets and liabilities are well explained with simple, practical examples.

Though the examples quoted are mostly about American Multinational companies, the concepts explained are common to all investors.

In the Indian context, where many people have started actively investing in the stock market and with the recent shower of IPOs (initial public offering), the techniques mentioned in this book will help to value investment and take an informed decision.

HAPPY READING AND HAPPY INVESTING

VALUATION METHODS – FORMULA TO FIND THE TRUE VALUE OF A COMPANY’S SHARE

*Margin of safety -After calculating the true share value by adopting the above methods, it is important to discount the value further using  a margin of safety.

E.g., if Net current asset value per share is Rs 99/ share. We assume a margin of safety of 1/3^rd. Then the value per share is 99*2/3=Rs 66, which we are willing to pay for the share.

Glossary

1. Assets – Things that a business owns – e.g., Cash, Inventory, Accounts receivable (debtors), Property, Plant & Equipment
2. Liabilities – Things that a business owes-Loans borrowed, Accounts payable (creditors)
3. Equity – Net worth of a business – the money that belongs to shareholders.                                                           Equity = Assets – Liabilities. Equity is comprised of Capital and Retained earnings
4. Capital – The amount contributed by shareholders to start a business
5. Retained Earnings – Accumulated profits of prior years that were retained to finance business instead of distributing as dividends to shareholders
6. Current Assets – Assets that can be quickly converted into cash, i.e., within a year- E.g., Cash, Accounts receivable, inventory
7. EPS – Earnings per share= Profit after Tax/ No of shares outstanding
8. Return on Equity = Profit after tax/ Equity
9. Free Cash Flow = Net cash from operating activities- capital expenditure
10. Debt-Equity Ratio = Total liabilities/Equity

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