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

Worth of the Advice of Wall Street Experts

Wall Street Expert Taking the SubwayAdvising Rich Man Coming in a Rolls-Royce

"Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway"

Warren Buffett

How true!

Warren Buffett, Berkshire Hathaway, wants to highlight this ridiculous but true reality. Indeed Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway. 

Warren Buffett's contention is that if these people truly had valuable investment advice to offer they will be employing it first to enrich themselves and would not be taking the subway.

Buffett intends no insult to stockbrokers nor is he against using the subway, but is advising the investors to take the advice of so called experts with a pinch of salt.

Value-investors who have read "The Intelligent Investor" by Benjamin Graham and following in the footsteps of legendary value-investors like Walter Schloss, Charles Munger, Warren Buffett,  of Berkshire Hathaway, do not require the tips and advice of stockbrokers to obtain significant investment success.

Market Fluctuations Are Investor's Friend

Picture Depicts Markets Fluctuating Like a Pendulum Between Enthusiasm and Pessimism

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

Warren Buffett

In these golden words Warren Buffett, Chairman of Berkshire Hathaway is advising investors to consider market fluctuations in the form of ups and slides as a friend rather than an enemy.

Why?

Without market fluctuations - extreme once in a decade - extraordinary gains cannot be obtained. In the absence of market fluctuations there is no scope for capital appreciation. Stocks too will be bland like fixed deposits in a bank.

This is the first part.

The second part is to profit from the folly (of others) than participate in it.

What does this mean?

Buy stocks at or below their intrinsic value - not at their market peaks.

Innocent investors make the folly of entering the market when it is at its peak and buy shares at extremely high and unjustified prices. When the price slides or steeply corrects they panic and sell the investment at a loss. This is the folly Warren Buffett the Chairman of Berkshire Hathaway is advising not to participate in.

But how to profit from the folly?

Buy the shares of excellent companies at throw away prices when they are being dumped by others in panic.

In conclusion fluctuations are natural and inherent to markets. Capital appreciation or wealth creation takes place only on account of market fluctuations. My guru Warren Buffet, the siren of Omaha and Chairman of Berkshire Hathaway is advising investors to consider market fluctuations in the form of ups and slides as a friend rather than an enemy and to profit from and not participate in them.

Warren Buffett the Siren from Omaha

Rearview Mirror Is Clearer Than the Windshield Slide

Picture Conceptualises that Rearview Mirror is Clearer than the Windshield

Importance of Saying No to Investment Opportunities

Slide Depicts Importance of Saying No to Investment Opportunities

Dancing In and Out of Investments Quote Slide

Warren Buffett's Quote Advising Not to Dance In and Out of Investments

Saying No to Investment Opportunities

"It is more important to say "no" to an opportunity, than say "yes."

Warren Buffett

While investing, especially during evaluation stocks a value investor will confront with a number of opportunities seemingly attractive and often tempting. Warren Buffett is advocating a bias towards rejection – saying no, rather than saying yes.

This rule is similar to the rule for discarding junk at homes and offices during the process of cleaning. We will come across a number of items where our minds tell us to keep the items for potential future use. If we follow the advice, we will accumulate unwanted junk. The rule to junk is simple and harsh – if in doubt - discard! The rule is advocating a positive bias for junking.

As with the rule for discarding, Warren Buffet is advocating a positive bias towards rejecting – saying “no” to an opportunity than saying “yes”. The logic behind this advice is far better to err on the side of caution than otherwise.

Picture Conceptualises Bias Towards Saying No to Opportunities

Hindsight Versus Foresight

Automobile Rearview Mirror Picture Conceptualising Hindsight

"In the business world, the rearview mirror is always clearer than the windshield"

Warren Buffett

Warren Buffett wants to say through the crisp sentence that in business hindsight is far clearer than foresight - it is far better to draw conclusions based on past data rather than divining the future.

These golden words do apply to investing, nay, life itself. Don’t you think so?

Value investors burn midnight oil analyzing annual reports of the companies, going back into the past as deeply as possible, but not less than 10 to 15 years, to draw meaningful conclusions about the business model, management philosophy, integrity and so on.

On the contrary the so-called experts, the filler material of print and television media do not hesitate to make predictions about future prospects of companies at the drop of the hat. Such predictions not only prove to be fallacies but dangerous for innocent investors.

Related Posts:

• Predicting the Market Versus Reacting To It
• How Stock Markets will Behave in 2017?

Warren Buffett's Portrait Depicting Inspirational Quotes