Investing on the stock market with Warren Buffett (secret)Edit

I've read some books & watched some movies with Warren Buffet, but I've sensed that he wasn't able to explain clearly (for the novice person) in steps what he is up to, when investing. I've also searched other pages in a "travel" to get the "secret formula". I've came up with some points, who reveal his strategy of investing.

Investing is important (currently), because in the way to power you would need to have a portfolio of companies, to secure your earnings from a different sources in case if one would dry up.

I've came up with the simple formula, although it may not be covering all the issues, but it gives you a some sort of perspective with moderate explanation on how to view the investments & how to invest, without the speculative way (long term earning recipe).

1. (choosing the right) COMPANY type & [associated with the] product (products) it sells.
   There are basically 3 types of companies in which Buffett is interested, but the main rule is always one: the company needs to have durable competitive advantage.
   
   First of the co. are those, who have a product which is not meant to be changed, because its already selling, has a competitive advantage which allows him to be be a part of the society. The example of such companies are COCA-COLA/PEPSI. They've got products which lay deep in the minds of many and their sudden shut-down would be consider a total disaster ("they've got part in the human mind&soul"). One main thing with those companies is that they don't need to change e.g. the production line, they don't need to spent money on research constant applying to the new trends, new product lines, but they are instead a tools which generate money on a consistent basis, without almost no competition in the market, because they're in some sense of way: unique.
   Imagine on other hand, e.g. technology companies producing hardware – they need to put their money on a constant development, research – changing all that machines which are used to produce the new line of products (and what if the new product not sells? is/might be inferior to the product of competition in some way leading to its ignorance by clients?). If they have not got the new products which are more competitive in the long run, those companies often crash, producing not a steady-over-time income. They need to constantly invest money in new projects, innovate. It's in some sense of way: a total opposition to the companies mentioned before, who can use the cash for acquiring new businesses, spent them on a pensions for the managers. Those companies, who constantly need to put a new set of their products are also very often vulnerable to the ups & downs of the market place, needing to fire lots of people and also managing of them is challenging & few mistakes and they could get down. It's like competing with all the giants in the motor industry, like Ford, Opel, Audi etc. Those companies are risky to invest, because they may not produce a steady cash-flow over long periods of time & the burnout of the money is/may be significant.
   
   Another companies are those who are replying on the basic needs of people, e.g. co. filling "tax counting/return" papers (all the tax work), etc. and have got in some sense of way "a brand in the human minds", leader in the market – that makes for people to almost always choose them. They've got also some sort of dominance over the market place. Those companies are good, because people would always need to use some services, not dependable on the current state of economy like e.g. filling tax papers, so the need for those services is ongoing [on forever].
   
   The last type of companies are those in the retail business (& also co. which sell the products which are necessities, like e.g. oil) – that sell to other people things. Those companies constantly require lowered costs of production, higher volume & higher sell. Those are the companies which often also produce the high-steady returns, but the need for competitiveness may drastically reduce their profit margins.



2. CONSISTENCY of share value increase over period of 10 years.
   It's easy to perform this check in the public companies, noted on the stock market, but this check also could be verified in the private companies by counting worth of their employees stock/options value.
   
   Thing is that Warren looks constantly over a companies which produce continual growth over a steady period of time, e.g. (going almost always up)
   
   (year) – (value of 1 unit of stock)
   2000 – 1
   2001 – 1.16
   2002 – 1.34
   2003 – 1.51
   ...
   2009 – 2.91
   
   NOT.
   
   2000 – 1
   2001 – 1.2
   2002 – 1.15
   2003 – 1.07 (see the loses here? in per/unit value?)
   ...
   2009 – 1.4
   
   It may indicate that the company has a product which sells in a constant growth. The second example (table) may indicate a business which is the Ist type of business (mentioned before), which burns a lot of money, due to e.g. changing production lines, bad periods in the economy etc. etc.



3. COMPANIES which passed DEBT-TEST [DEBT-FREE or DEBT-little companies] & which are (often) self-financing (however not necessarily, e.g. "that would become", see 1. point).
   Low or none debt indicates that the company performs well and its an opportunity to get into it. Although debt may be the result of expanding it and would soon be repaid by the overall performance of selling the product(s), that this company is selling.



4. High ratio of "margin".
   
   
   gross profit / (divided by) revenue [times] * 100% = margin
   
   Margin of profit needs to be quite huge, preferable min. of 50%. It indicates that company is performing successful and at its best. Although mainly companies which have e.g. 14% profit margin (after all the expenditures) indicate that company hasn't got the durable competitive advantage and/or its not well managed in risk of not sustaining itself on the market place.
   
   As an example, co. gross profits 10M, revenue (total) is 15M, so the "margin" is on the level of 50%, which indicates good performance of the investment.

Those factors may indicate that this company its good for the long term investment (meaning= steady gains, over time & increase of its value).

You can choose those businesses to pursue in – your career.

Companies like those – exist, but you need to put focus on finding them & getting the deal. Start-up companies, when picked wisely – offer the hugest return ratio, although they're high-risk investments. Maybe you should consider signing yourself to the business angel seed networks (if you've got free capital to invest, left)? If no, you need to find a way to make it or get it (maybe by joining a team which does a new start-up) or make on your own means – you're own business (like I do & did in the past [my story, blog]). It's up to you.

Remember that its not indicating on "how to invest" (Warren Buffett primarily always wants to get 51% of shares of each company and its a smart way to do, however not always possible – specially not on the beginning), but rather "what companies to pick up".

* Warren Buffet is the best, public person – which is (at a time) the most worth investor in the world [US$50 billion (2011), #3rd most richest person in the world].



You only need to learn: how to do it or to get into the circumstances which would allow you do get there (or create them on your own).

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