Warrent Buffet’s secret revealed

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Warren Buffett does not readily disclose the investments he makes on behalf of himself or Berkshire Hathaway. He does, every year, report on the substantial holdings of his company in other corporations. These provide only tiny clues however to why, when and where he invests.

Stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business. According to Warren Buffett, the below are the principles for sound investments strategies.

1. Do not follow the crowd. Ignore the market, the crowd, and its fashions.
2. Have fixed investment principles.
3. Do not put your eggs in many baskets. Put all your eggs in one basket  and proceed to watch that basket.
4. Do not rely on outside analysis. Do your own research and do it thoroughly.
5. Do not often act on a hunch. Always have sound, well-argued, well-researched reasons for your investments.
6. Do not place small amounts in each basket. Only buy if you are prepared to put at least 10% of your net worth into the stock.
7. Do not watch the market intently. Do not switch holdings frequently. Expect to hold your investments for ever. Do not avoid holding cash.

Additionally, the references could be made to below mentioned principles.

1. The company should be soundly managed. Tests of good management include:
   • Share buybacks
   • Good use of retained earnings
   • Sticking to what you know
2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
   • Company growth
   • Dealing with inflation
   • Capital expenditure
   • Look through earnings
   • Brand names
3. The company should have consistently high returns. Warren Buffett would look at both:
   • Returns on equity
   • Returns on capital
4. The company should have a prudent approach to debt.
5. The businesses of the company should be simple and the investor should have an understanding of the company.
6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
   • Price/earnings ratios
   • Earnings and Dividend yields
   • Book value
   • Comparative rates of return
7. Investors need to take a long term approach.

Some Books Recommended by Warren Buffet for investment

There are books that tell you in-depth about strategies developed by Warren Buffet. Then there are those books that are recommended by the man, Warren Buffet himself. Here are some of those: Take on the Street: by Arthur Levitt Levitt. He served as the Securities and Exchange Commissions chairman for the longest term. Levitt tells you about the tactics developed by the Wall Street money hoarders in simple and direct language, then tells you how to make your way through them. The Little Book of Common Sense Investing: by John C. Bogle. He has filled all the pages of the book with deep insights and practical advice. The book tells you investment is not easy, as it requires discipline and patience, at the same time it’s all about common sense.

Buffett, whose investment strategies and techniques are still regarded by most as the best and most successful ever, was not spared from the recent global financial crisis. Weighed down by losses from investments and derivative bets, his investment arm Berkshire Hathaway posted a net loss of US$1.53bil (RM5.43bil)  its worst loss in at least two decades  for the quarter to March 31, compared with a profit of US$940mil in the same period a year ago. But the company returned to the black with a second-quarter profit of US$3.29bil on improved stock markets and credit derivative gains.