Legendary investor Warren Buffett has made more money than any investors in the world by just investing in the right business. Warren Buffett has his own way of investing. Every investor in the world must know him and always eager to learn from him.
Warren Buffet always says that investing is not hard, students with basic knowledge of numbers can do investing. He also says that investing does not require a high IQ. Anyone with a rational mind can do investing.
Warren Buffett has developed four simple rules for investing.
It’s what Warren Buffet looks for in the business:
- One that we understand
- With favorable long-term prospects
- Operated by honest and competent people
- Available at a very attractive price.
Now let’s understand each rule one by one
1. Business should be understandable
Buffett says that he only invests in the business which he understands. He never invested in the technology business because he said that it is out of their circle of competence.
He only invests in the business which is in their circle of competence.
Here understandable means you are able to understand the business and economics of the company. How companies are making money.
To become a better investor you must know each and everything about the business. To invest in an understandable business, always start looking from your neighborhood. Which company and business are doing good. Here you will find the best business to invest in.
2. Business should have long-term prospects
Buffet likes to invest in the business which is going to be there 10 to 20 years from now. Buffett’s investing approach is always long term. He invests in the business which has long term competitive advantages.
Here long-term prospects mean a business should be stable enough that they do not get out of the business easily.
To understand the long term prospects look for debt, if the company does not have debt, it can not get bankrupt.
Also, look for competitive advantages in the business and for good management.
3. Business should have honest and competent management
Managements are those who are running the business, if management is the great business will be great.
Management is responsible for the decision in any company, good decisions lead to better performance and bad decisions can lead a company into trouble.
There is not any method to check the quality of the management unless you know them personally.
There are several parameters from which you can determine the management integrity and competence.
- look for the promoter holdings, good business must have higher promoter holdings.
- Look for pledging of the shares, pledging of shares is a negative sign for any company.
4. Buy at an attractive price
Buffet said that if you buy good business at a higher price you will never make any money. To make profits from the stock market you have to buy at the right price.
Buffet said in his letters of Berkshire Hathaway letters to shareholders that we usually can identify a small number of potential investment meeting requirements first, second, and third but fourth often prevents action.
Finding good business is not that tough, tough is to buy at the right price. Finding the right price is important and it is often difficult to assess the right price for any stocks.
To determine the right price you have to calculate the intrinsic value of the business and when the price is below your calculated intrinsic value then it is a buying decision.
Buffett is a well-known investor. He has made more money than any other investor in the world. It’s always inspiring to learn from those who have excelled in their field. For investing Warren Buffett is the best place to learn. There are many books written on Buffett. You can also read his Annual letters to the shareholders.
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