Going back 55 years, a $10 000 investment in Buffett’s holding company Berkshire Hathaway, would be worth over $100 Million today! In this video I discuss 6 of the investing rules that Warren Buffett has used throughout his life to achieve high and consistent returns in the stock market. ★★Free Training Video On My 4-Step Investing Strategy★★
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The 6 Investing Rules:
(1) Price is what you pay, value is what you get
Warren talks about making a clear distinction between the price paid for a business and what the business is actually worth. In this section I include a clip of Buffett explaining his definition of intrinsic value, as the total sum of cash expected to be returned to shareholders in the future. This means that the value of a company is entirely separate to the price someone can pay for it on the stock market and that two people investing in the same company can achieve entirely different returns over the long term if they paid different prices.
(2) 10 Years, 10 Minutes Rule
Warren Buffett recognises that the markets and businesses are highly unpredictable in the short term, and as investors we should therefore only ever invest in businesses if we are comfortable holding them for 10 or more years. Only over the long term is business value represented fairly in it’s stock price, while over shorter periods the stock price is at the mercy of short-term influences such as analysts, fund managers and other short-term, industry events.
(3) Rule #1
The first rule of investing, according to Warren Buffett, is to don’t lose money. This means only investing in companies with low downside and moderate to high upside. If you don’t protect your downside, you will never be able to maintain a high rate of return.
(4) High ROTA or ROIC
Buffett’s favourite measure of how great a business is, is the Return On Tangible Assets. This is essentially a measure of the cash generated by a business compared to what it needs to reinvest to maintain those cash flows. The best businesses need to invest very little to produce high amounts of cash flow, and those businesses have a high ROTA and return on invested capital.
(5) Durable competitive advantages
Another important aspect of a great business is one with a distinct advantage over the other businesses in the industry. By limiting investments to those with unique advantages, we can be confident that the business will be thriving for 10 or more years.
(6) Invest in what you know
Ultimately, the biggest factor in accurately analysing businesses is our level of understanding of the business and it’s industry. Our understanding influences our ability to identify competitive advantages, assess management, and to estimate future cash flows accurately.
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Disclaimer:
The information in this video is general information only and should not be taken as constituting professional advice from Hamish Hodder.
Hamish Hodder is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances.
Hamish Hodder is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this video.
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