Invest in Stock Market; The Warren Buffett Way
We all know Warren Buffett, the stock market mogul and considered as the world’s greatest investor. He owns the company Berkshire Hathaway which has the most expensive stock in the world. But who is the mentor of Warren when it comes to picking the right stocks to buy? It’s Benjamin Graham.
“An intelligent investor should buy common stocks with a margin of safety, a large discount to book value or “intrinsic value”, and sell when prices approach full value”. This timeless advice comes from Warren’s mentor Benjamin Graham who consistently beat the stock market during a lifetime of investing in the 20th century.
Stock prices usually go up and down for several reasons. But more often, they will drop or climb for reasons that have nothing to do with the earning power or value of the company. As an intelligent investor, you should never forget that you are buying not just a stock, but also a part ownership in a business.
Let’s learn from these two stock market moguls from the book “The Intelligent Investor.”
Buy when stocks are low. Everybody knows this basic rule. Buy when stocks are low and sell it when it’s high. In the long run, the success of investing in any stock will be determined by the value of that company. Moreover, in the short run, you may have the opportunity to buy shares of a good company at a bargain price when the market is depressed after a major stock market crash just like nowadays that we are experiencing one of the most severe global financial crisis.
It takes great courage to buy at a time when everyone is rushing to sell stocks. But if you do your homework and know that the company is sound, you will rejoice as you eventually see an end to the market’s depressive phase as prices start to go up.
Watch out for irrational stock peaks. After stabilizing, the market can later go into “manic” phase, and your stock may soar. This was the case with the start of the “internet age” back in the 1990s where irrational excitement caused stocks to rise quickly. The ‘bubble’ grew larger and larger until it peaked in a bull market and eventually burst that ended a drastic crash. This is the case again now where the subprime mortgage crisis caused a stock market crash due to a lenient credit market. You need to be careful you don’t get swept up in that type of situation. I admit I was one of the victims of this recent phenomenon.
Know when to sell a stock. Figuring out when to sell a stock can be harder than deciding whether a bargain stock may be profitable. Graham analyzed price and value. He then bought stocks of companies with little debt and lots of cash or marketable securities per price of each share.
His student, Warren Buffett grew to appreciate the importance of buying not just “bargain” stocks, but attractively priced stocks of companies that had competitive advantages that made them more profitable than their competitors.
Warren Buffett buys only a handful of stocks of the best businesses with extraordinary good management. They also have strong “moats” that prevents competitors from successfully attacking markets for their products. Buffett buys when the price is right and holds stocks, sometimes even for decades, as long as they keep their competitive advantages. In this way, Buffett avoids paying capital gains taxes.
Hold on to your stocks. Buffett’s way of investing in the stock market is better for most investors. By following Buffett’s “holding” philosophy, you won’t have to constantly wonder if you should sell the stock when it goes up.
According to Buffett, the only time you should sell a stock is if you see a fundamental change in the business that takes away its long-term competitive advantage. Or you may want to take advantage of bull markets or a manic phase in the economy and sell when the stock price is inflated way beyond the value of its current and projected earnings.
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March 23rd, 2009 at 10:47 am
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March 23rd, 2009 at 10:06 pm
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March 24th, 2009 at 1:08 am
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March 24th, 2009 at 11:23 pm
what if warren dies? do we see a protege?
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March 25th, 2009 at 4:33 am
Thanks for stopping by my blog yesterday and for your thoughtful comment. I always love to connect with and support bloggers in our niche! I look forward to reading more and exchanging ideas. I can tell we have a bunch in common already, as I follow Warren closly!
Blessings,
Brandon
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April 16th, 2009 at 8:39 pm
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I’ve seen an article before telling stock holders of his company Berkshire Hathaway that as long as Warren lives, they should hold on to that stock because it will continue to appreciate in the long run.
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On the other hand, I believe Warren is giving bulk of his wealth to charity with just a few left for his children. He said ““I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing”.
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June 19th, 2009 at 2:18 am
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