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Four important techniques used by Warren Buffet for Stock Market investing

Warren Buffet is one of the greatest value investors of all time.He has gave a new direction to the stock market investing.He is currently third wealthiest person in the world. His innovative and creative investing strategies has helped him to become successful investor.He is also the leading philanthropist of United States of America.Following are the most important techniques used by him while doing stock market investing.

Understanding of the Business

This is first important tip for the value investors. Warren buffet and other successful stock market investors mostly invest in businesses they understand. They know that how basic operations of the company work and what are the main business cycles of the business.Warren buffet has made considerable investments in Coca Cola,Apple Inc and IBM.He has in depth knowledge of the these businesses and knows basic things about operations of these companies.

Focus on Industry

Warren buffet focuses on the industry rather than overall stock market index or economy. He researches about the basic fundamentals of  companies or overall industry.He gives special importance to financial metrics like return on equity and free cash flow.Warren buffet thinks that measures such as return on equity are more important than the measures like earnings per share.

Intrinsic Value

Warren buffet gives special importance to the intrinsic value of a stock.Intrinsic value is the real or true value of a stock.It can be calculated by keeping in mind all the important factors of  a security. It analyses the fundamentals of the company or stock.The discounted cash flow model is mostly used by investors to measure the intrinsic value of stock. DCF is used in the dividend discount model and Gordon growth model to value the stocks.

Dividend discount model can explained by the following equation

Value of stock = Div 1/(1+r)2 + Div 2/(1+r)2……………………..

here :

r= required rate of return by investor

Div= dividend for the year

 

Gordon growth model can explained by the following equation

Value of stock = DPS1/g

here :

r= required rate of return by investor

DPS1= expected dividends in next one year

g=annual growth rate of the dividends of the share

Management

Warrten Buffett has identified   management principles needed to measure the quality of management of company. This is one of the most important principles made by Warren Buffet.Most of the investors think that this is the most difficult thing to do . This is perhaps the most complex thing to do  for an investor.  A good company always reinvests the retained earnings in the company.It is also very important for company to spend the retained earnings for betterment of the company shareholders.Good spending on dividends improves the shareholder value of the company.The most important thing is to spend retained earning by paying out the dividends to shareholders. Warren buffet thinks that greedy company avoids investing for the betterment of the shareholders.

Second most important principles is honesty with the shareholders.It is very important for management not to blindly follow the competitive companies.A honest company avoids to blindly copy the competitor’s strategies. A good company also outpaces the competitor companies by creating innovative strategies.

 

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About Emaad Qureshi