How Warren Buffett Trades in Stocks?

Picture shows a person engaged in trading in stocks

Actual Question:

How does Warren buffet analyse companies for trading?

Answer

Dear Friend

Thank you for an insightful question.

Your question has two distinct parts:

1.     How Warren Buffett, Chairman Berkshire Hathaway, analyses companies

2.     How does he employ the findings for trading.

The factual answer is that Warren Buffett does not indulge in trading in stocks and he analyses companies based on value-investing principles, propounded by Benjamin Graham in two books:

1.     The Intelligent Investor

2.     Securities Analysis

In a nutshell value-investing is about:

• Identifying wonderful companies that have strong and unshakable franchise like brand and product excellence - examples Gillette and Coca-Cola;
• Determining the intrinsic values of shares of such companies;
• Buying those stocks below their intrinsic value or maximum at par - ideally during unjustifiable market lows like the post Lehman Brothers collapse;
• Holding the investments intact for decades, reaping regular dividends and letting the original capital appreciate significantly;
• Maybe, sell those highly capital appreciated investments during unjustifiable market highs like during the period just before the Lehman Brothers collapse, investing the proceeds in regular income generating instruments like bonds, which again are bought at a discount, till the time again the markets turn unreasonably pessimistic.

Picture of the book "The Intelligent Investor" by Benjamin Graham

Coming back to the second part of your question, you might have already realised by now, from the above explanations, that Warren Buffett, Chairman Berkshire Hathaway,  does not indulge in trading - meaning intra-day or short-term trading - which is based purely on expectations of short-term price rises and slides. In fact day-trading and margin trading

Suggested further reading:

• How to Calculate the Intrinsic Value Shares?
• Intrinsic Value As Described by Benjamin Graham Video
• Margin of Safety
• Market Fluctuations Are Investor's Friend
• Day Trading Definition
• Margin Trading Definition

Thank you,

With best regards,

Anand

What is Fundamental Analysis of a Company or Stock? - Slide

Slide Explaining Fundamental Analysis of a Company's Stock

What is the Differences Between Fundamental and Technical Analysis?

Fundamental Analysis:

Picture Depicts the Concept of Fundamental Analysis

Fundamental analysis is a thorough analysis of company carried out with the intention of buying the shares for long-term investment. It is based on studying the profitability of the operations, assets and liabilities position, cash flows, etc., going as far back into the past as possible. During the process a number of important ratios as under are derived and used:

1. Profitability Ratios: EBDITA, EBT, PBT and PAT margins.
2. Liquidity Ratios: Current and Quick Ratios.
3. Long term Leverage Ratios: Debt-Equity and TOL/ TNW.
4. Market Conditions: PE Ratio, Price to Book Value, Dividend Yield, Distance fro 52 week-low. Five-Year Returns.

Picture Shows Fundamentals of Infosy Share

Technical Analysis:

Technical Analysis is the charting the price movements and attempting to interpret short-term market behaviour of stock with intention of making a profit from trading in stocks, commodities and currencies and their derivatives.

Candle Stick Chart of Infosys Ltd. Share from May to October 2016

Differences between Fundamental and Technical Analysis:

Differences Between Fundamental and Technical Analysis
Sl. No.	Fundamental Analysis	Technical Analysis
1	Rational Science	Pseudo Science
2	Current Market Price is one of the inputs	Market prices and their movements is the only input – facts relating company’s performance are not relevant
3	Used for evaluating fitness of stocks for long term investment	Used for taking short terms positions
4	Does not involve market prediction	Prediction of future market behavior is the sole purpose of technical analysis
5	Used by investors	Used by day traders and margin traders
6	Primarily intended for taking delivery of scrips	Not intended for taking delivery – trades are primarily meant to be squared-off within the same day or by the end of the contract period
7	Only relates physical shares	Primarily relates derivatives like futures and options but also involves physical shares in the intra-day trading

Conclusion:

While fundamental analysis is an exacting and rational discipline, technical analysis is a false study endeavouring to derive legitimacy from the use of charts and graphs and the lofty sounding name. Whatever realisation of predictions may be owing to the innumerable practitioners acting according to the interpretation of the pattern and not directly caused by the pattern – something akin to divination of future employed in the ancient times.