Warren Buffett through the Berkshire Hathaway Group has been consistently one of the best investors in the stock market for many years. With success comes opportunity to learn from him and duplicate the success for you. In the stock market there are multiple methods to come to decision to buy and sell stock and when you find the correct formula for you then it likely will be a combination of more than one investor. A number of years ago, Mary Buffett wrote a book called Buffettology published by Rawson Associates, NY, 1997 in which she outlines the process or techniques which Mr. Buffett uses.

1. Investing from a Business Perspective

Fortunately for all of us, there are many opportunities for you to invest your money, and as long as there are choices there is the opportunity to say no. Investing for a business perspective means to build a discipline not so much what to buy, but what not to buy.

Warren’s chief idea is to buy excellent businesses at a price that makes business sense. So what makes business sense? In Warren’s decision making process business sense means the venture invested will offer you the highest predictable annual compounding rate of return with the least amount of risk. To do this first thing 5 to 10 years horizon and when evaluating companies you determine what you can make then look at alternatives to see what they are offering. (it would be similar to looking at certificate of deposit rates from various institutions before picking one. Only expecting more from the markets).

In the 1900’s most people bought bonds as investments and received bond interest. The stock markets were to be nice rigged and much of Benjamin Graham’s book Security Analysis printed in 1934 dealt with discovering accounting fraud. Now days we all tend to rely on Securities Commission to keep companies reasonably honest, but it still happens, just not as blatant. Warren believes common stocks bear a resemblance to bonds that have variable rates of return. When the common stock does this because one can project earnings, he calculates his rate of return by dividing the share price by the company’s annual net per share earnings. The assumption of the calculation is based on the wholly dependent on the predictability of the company’s earnings.

2. The Price You Pay determines Your Rate of Return

The price you pay determines your rate of return  and that is why you want to buy reasonably low, receive a dividend and in the future sell high.

In order to determine the rate of return, you must be able to reasonably predict the company’s future earnings. If you bought a bond, you would know what the interest rate going forward and using Present Value tables determine if it is a good price to gain what you want. For stocks, not all of them, but those that expect to earn at least what they earned this year, you can determine if the risk is worth the stock price.

Linking to dividend paying stocks, on the stock markets what you say no will determine your rate of return. There are many methods to invest or alternatives given your risk reward ratio and in investing the first rule of thumb is try not to lose money. One method is to invest in profitable stocks which pay a dividend. Use Warren’s methodology to help you pick from the best basket, not just the basket you are offered.

There are more questions than answers, till the next time – to raising questions.