011-2020 7 Secrets to investing like Warren Buffet

Title: 7 Secrets to investing like Warren Buffet

Author: Mary Buffett & Sean Seah

Good afternoon everyone,

Today, I give you a review of a book that a friend recommended to me a while ago, which I haven’t previously gotten around to reading yet. We regularly exchange information on companies we feel have the potential for growth, as well as what we think could be something we should be looking out for in the next few years. I would say he is the first member of my Master Mind Group. (if you want to find out where that reference comes from, I would recommend the book “Think and Grow Rich” by Napoleon Hill)

The book is split between two topics, intentionally. Between becoming a person (habits and mindset) that is happy, healthy and up for the game of investing ; and then of course the investment strategy part.

The order in which the chapters were structured are clear, because they wish to get you to understand that you can change small things to get into a good state of mind before taking part in the game of investing. Then they introduce you to the term ‘value investing‘, which itself is the strategy adopted to approach buying shares in companies.

The idea of applying a strategy of course is to approach a situation as best prepared as we possibly can be, and mitigate the risks as much as possible, rather than going in unprepared and exposed to the full impact of all risks combined.

With this favoured approach, you are taught a whole bunch of lessons, some of which you may have even heard from interviews with Warren Buffet. Among them are the following:

  • Circle of Competence
  • Economic Moat
  • Financial Statement Analysis
    • Is the Equity growing over time?
    • Does the business have huge debt? (Debt-Equity ratio)
    • How consistent are the company profits?
    • Is the company using its returns efficiently? (Return on Equity)
    • What is the Net cash from Operating Activity position?
    • What is the Free Cf position of the company?
  • Valuation
    • Net – Net Valuation (current A vs current L)
    • Price to Book Value (stock price vs company book value)
    • PE Ratio (stock price relative to latest earnings)
    • Dividend Yield (dividend pay-out relative to stock price)
    • Graham’s Growth Formula (calculate value to include earnings expected of the future)
  • Margin of safety
  • Portfolio Risk Management
  • etc.
  • They also have a website where you could advance you training, which I haven’t tried but just thought I can mention as a bonus (www.buffettonlineschool.com – search for the name in Google and you should be able to find it)

Not giving away too much, a brief summary from my side of some of the topics listed above:

  • You shouldn’t follow with the crowd and invest in what everyone else is investing, just because that’s what the crowd is doing. You should invest in what you believe holds the greatest value, and will continue to do so. That said, you generally can only make such a call if you understand what the product/service is that they are offering.
  • Since an investment holds some risks, it would be ideal to know of some factors that mitigate those risks to support you to move ahead with the decision to invest.
  • As much as it is important to consider the factors above (qualitative factors), we cannot conclude on a big decision without also performing some sort of financial analyses, to establish whether the company is able to carry on with its trading activities.
  • Finally, when a decision was made to invest, we need to further consider whether we hold that same belief in the coming years, for all the companies we invested in. We check back in our portfolio to see whether the value we expected the company to have still exists present day, and whether the future prospects are what is in line with our investment approach.

I had already read some other finance material in the past, and thus even wondered if I would gain more financial insight if I read this as well, or whether it would just be a refresher of what I already knew. However, I believe it was of benefit to read this little booklet as well, as the authors really broke down the finance jargon into easily understandable lingo, and even made some clarifications to some of the jargon that I had previously over-complicated.

Summary:

Good intro read for anybody that is interested to get started with investing in the stock market. Chapters are short and straight to the point, without long complex explanations. The book for me deserves a good 4.5/5, since it is very good to help a large audience to enter another industry, vital for anyone that wishes to improve their financial independence.

Until next time, happy reading!