Resources on the Topic:How To Pick Stocks Like Warren Buffet By Timothy Vick
The Little Book of Value Investing By Christopher H. Browne
Yahoo Finance
Scottrade
When discussing paths to prosperity, it would be unfair not to give Warren Buffett his fair credit. His road to riches has been one of the most well documented of all time. People are fascinated by his simplicity, modesty, and unbelievable ability to find great values. He is the second richest man in the world for a reason!
First off, to say that Buffett accumulated all of his wealth through simple value investing would be a farce. In his early days, he was a master entrepreneur and arbitrager. He used those techniques to build a massive pile of wealth, and then by mastering value investing, he grew that wealth to the enormous amounts we know of today.
So what exactly is value investing? In it's simplest form, it means finding a great company that has been abandoned unfairly by the market due to some short term issues. The concept preys on the fact that in the near term, the markets are driven by emotion rather than logic, but in the long term, logic will eventually prevail.
So what are some recent examples of value investments done right? Take Procter and Gamble as an example. This consumer products maker has been one of the most stable companies in American history, creating exciting, dynamic products that customers depend on every day.
Through that, they are able to guarantee great profits year after year. In theory, this should lead to steady stock values increases, but as you can see from looking at their chart, this is not always the case. If you head to Yahoo Finance and search for ticker symbol PG, you will see that the stock price fell drastically in the end of 1999, from a value of nearly $55 to a value of $28. While P&G may have had some short term difficulties, there was little doubt that they would eventually return to their money making status, and in doing so return a great value to their investors. And of course they did, with the stock price topping $70 within the next 8 years.Fortunately, for those of you just getting started in the world of value investing, you couldn't have come in at a better time. The markets have absolutely collapsed over the past year, leaving no companies unscathed. This means that the opportunities exist for each of us to find our own P&G. Here's how to do it:
1) Get a pocket sized notebook and carry it around with you for the next few weeks.
2) In it, list every product that you use and depend on every day (ie. Nike, General Mills, Honda, Apple, Time Warner, Coca-Cola, Scottslawn, Colgate-Palmolive, Microsoft, McDonald's, Chipotle, etc.)
3) Take this list, hopefully at least 50 companies, and create a free portfolio of them on Yahoo Finance.
4) Using the key statistics tool, check these 4 key indicators to determine the companies true value.
-Current Ratio > 2.0 (This guarantees that their short term debt obligations are low)
-Return on Equity > 15% (This guarantees that they use their assets wisely)
-PE ratio < 15 (This guarantees the company is turning a profit) -Price/Book Ratio < 1.5 (This will eliminate some tech companies, but it guarantees that there are some underlying assets.) 5) Using a low price online investment firm such as Scottrade, diversify your money over these 5-6 companies. It really is that easy! The NUMBER 1 key to this strategy's success is patience. Remember, value investing is long term investing, so don't allow near term fluctuations to affect your decisions. In addition, the goal is to hold these stocks for life, so you don't have to be constantly seeking an exit point. Sleep easy, watch your money grow, and come back in 20 years to see a staggering amount of money! Good luck and happy value hunting!
Keys to Success:
Do Your Homework. Done right, value investing is not gambling.
Don't Check Your Stocks Every Day. The market ebbs and tides, that is understood. Don't stress with every dip.
Don't Try To Time The Market. Even the best professionals struggle with this, so you shouldn't even try.
The More You Invest, The More You Can Make. Buffett is legendary for his frugality, which provided him with even more funds to invest, these compounded and compounded helping him achieve such insane wealth.
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