Warren Buffett has been greatly influenced by the following people and their ideologies as far as buying long term stocks are concerned. All of his mentors has advised him into focusing on the possibility of buying long term stocks. Warren Buffett has always thought like a an Investor (not as a trader) and bought all his stocks/ businesses. He is the master of this game and takes buying stocks and business as his passion. He has always believed that one should buy stocks to own them forever and not to trade (quick selling). Long term investment stocks is all he wants to own. We will discuss in this blog various rules of long term investment that Warren Buffett uses to buys stocks.
Investing within “margin of safety” & take advantage of “greed and fear” of other investors
Benjamin Grahams influence on Warren Buffett is no secret. Graham taught his the concept of margin of safety and speculative nature of stock. Because of speculative nature of stock, real investors get to buy stocks with a ‘margin of safety’. Margin of safety asks you to focus on shares with low P/E ratio and buy stocks when its market price is less than two third of its book value. Traders and retail investors buys stocks with emotions, hence stock prices gyrate up and down on daily basis. The ‘greed’ and ‘fear’ drives our stock market lower than the logic. Graham has taught warren Buffett to take advantage of others greed and fear. When the stock prices falls below the book value of a share (approximately two third of book value) then it is the best time to buy it.
| 1 | Benjamin Graham |
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| 2 | Philip Fisher |
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| 3 | John Burr Williams |
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| 4 | Charlie Munger |
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Invest within your circle of competence
Philip Fishers teachings were almost like next step to Warren Buffett in race towards acquiring knowledge about investment. Fisher has made Warren Buffett unlearn the concept of diversifying his investments for the sake of reducing risks. He taught Warren Buffett that putting several eggs in one basket is not a bad idea provided you are keeping all eggs made of steel. He taught Warren Buffett to buy stocks of companies that have fundamentals as strong as steel. He taught Warren Buffett that buy stocks of companies after doing thorough research about uniqueness of its product, good management and so on. Basically he made Buffett see beyond the number crunches provided in a tailor made financial reports of a company. But unfortunately most of the common investors do not even see the financial reports before buying stocks; let aside increasing their competence by doing more study about the business. It is very important to know the minute details of the business and then buy their stocks. Of course this s is only applicable for those people who aspire to become a seasoned investor like Warren Buffett
Buy stocks of good companies when its price falls below its intrinsic value
John Burr Williams taught to calculate the intrinsic value of business. He made Buffett knowledgeable on the fact that how intrinsic value of company can help is identifying winning stocks. From him Warren Buffett learned to purchase stocks of companies that have ability to increase their intrinsic value over a long run. If you’ll ask Fisher, these companies that have “potential to increase their intrinsic value of long term” all good stock buys. As discussed by Benjamin Graham above, the speculative nature of stocks and greed and fear of investors often drive prices even lower than their intrinsic value. Stocks of exceptional companies below intrinsic value makes it a good long term investment prospect.
You can buy stock of great business even at higher prices
Theories of Charlie Munger is greatly driven by the concepts of Philip Fisher. Charlie Munger is a business partner of Warren Buffett and he is one influence on Warren that has drives Buffett away from Graham and towards Fisher. Munger always have advised Buffett to own few excellent stocks than many ordinary ones. Generally excellent stock are always overvalued, so Grahams margin of safety principal fails in this theory of Munger. But these companies believes in increasing the stockholders value year of year. By doing the intrinsic value analysis we can calculate the net present value of all future cash flow of the business. If present market value if substantially less than the future cash flow then it makes the business a good investment model.
But having said that, the above four influence has been in the world of stock investment since years, but it has not made every one a Warren Buffett, Why? Its because Warren Buffett is probably the only person who not only listened to them but also applied his learning’s.
You can read more here
- Top 5 rules of long term investment
- Long term investment
- Start stock market investment
- How Warren Buffett became a billionaire
- Long term hot stocks of BSE
- Investment options
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