Warren Buffet and his teachings about Trading

Warren Buffet and his teachings about Trading

1.      Circle of competence: Warren Buffet looks for the business he can understand and analyze. He only invests in the company that is in his circle of competence. For example, during the technology boom in the 1990s, everyone was investing in technology stocks. It didn’t matter to the investors to understand the underlying business of the company they were investing in it. However, Warren Buffett didn’t invest in technology stocks simply saying that he cannot understand them.

He said- ‘I can understand the business behind coca-cola, automobile or textile industry. I know how they work and how they can generate profit. I can predict their growth. However, I do not understand technology companies. These companies do not lie inside my circle of competence, therefore I do not invest in them’

2.      Management:Warren Buffett gives a lot of weight to an efficient management. He evaluates the management’s rationality towards reinvesting for growth along with rewarding its shareholders. Further, he is very stern about the honesty of a management.

3. Value: ‘Price is what you pay, Value is what you get’.

Warren Buffet spends a lot of time reading the financials of the company. He goes through all the annual reports of the company to find its profitability, returnability, liquidity, valuation etc. Warren Buffett always analyses the value of the company before looking at its market price. This is because he does not want to get biased by knowing the company’s market price before analyzing its financial statements.

4. Moat: The concept of the moat was popularised by Warren Buffett. A moat is a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack. Some stocks have a similar moat around them. That’s why it’s really tough for its competitors to defeat them in its sector. Warren Buffett always looks for a company with a wide economic moat. This moat helps the company’s business to outperform its competitors. The moat can be anything like brand value, license, patent, switching cost etc.

5. The margin of safety:

‘A good business is not a good investment if you overpay for it’.

The concept of margin of safety was originally introduced by Benjamin Graham, the father of value investing. He was also the mentor of WarreBuffetet.

This is the central concept of value investing.  Basically, this concept states that if you think a stock is valued at Rs 100 per share (fairly), there is no harm in giving yourself some benefit of the doubt (if you are wrong about this calculation) and buy at Rs 70, Rs 80 or Rs 90 instead. Here, the difference in the amount is your margin of safety.

Warren Buffett looks carefully for a margin of safety in a company before investing. He only invests if the company is currently selling at a discount.

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