How to invest like Warren Buffett

Warren Buffett is arguably the greatest investor alive.

But a little-known fact about the ‘Oracle of Omaha’ is that 99% of his wealth came after his 50th birthday.

That’s right. When Warren Buffett was 50 years old he was “only” worth around $100 million.

Today he’s worth over $105 billion.

Here’s a breakdown of the investment strategy he used to build wealth:

Warren Buffett is a value investor.

This means he looks to invest in companies that are “undervalued.”

In other words, companies whose stock prices are lower than what the company is actually worth.

But how you determine what a company is actually worth isn’t as simple as it seems.

Here are the 6 steps Warren Buffett uses to do it:

1. Return on Investment (ROI)

Buffett looks at the historical return on investment and compares it to the ROI of other companies in the industry.

The historical return should be within a span of at least 10 years.

This helps him determine how a company’s return holds up against its competitors and if it has a track record of weathering poor economic cycles.

Here’s how you can calculate ROI:

Net profit ÷ Initial cost

2. Debt-to-Equity Ratio (D/E Ratio)

The debt-to-equity ratio will tell you whether a company can afford to pay off its debt if it were to liquidate assets or use cash.

Here’s why it’s important:

• A company with lots of debt fuels earnings growth with borrowed money.

• A company with little debt fuels earnings growth with shareholder equity.

Buffett prefers to invest in companies that use their own resources, not debt, to fund growth.

He considers these to be signs of a strong company.

3. Profitability

How much does the company make after all its expenses?

Is the company consistently increasing its profit?

Buffett looks at least 5 years back for high-profit margins that are consistently increased and compares this to the company’s competitors.

However, I must note, just because a company is outperforming its competitors doesn’t mean that company is a good investment.

This is why Buffett looks for high-profit margins to accompany outperformance.

4. Age

How long has the company been public?

Buffett prefers companies that have been public for at least 10 years.

This way he avoids investing in volatile IPOs and has widely available historical data to use in his research.

More research makes it easier to make an informed decision.

5. Moat

What’s the company’s competitive advantage?

Buffett ignores companies whose products/services are too similar to its competitors.

If nothing sets a company apart from its competitors, how can it outperform them?

It can’t, and it won’t and Buffett understands this.

6. Intrinsic value

What is the market cap of the company, and what do the fundamentals say the market cap should be?

To answer this, Buffett looks at:

- Assets

- Earnings

- Future growth

And more.

If the fundamentals show the company should be valued at a stock price higher than what the company is trading at, it’s a buy.

If the fundamentals show the company’s stock is worth more than the company itself, Buffett avoids it.

That’s all for this week's newsletter.

See you next week!

- Wolf