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.

3. Valuing a Business

The key to valuing a business is before you buy, you determine what rate of return would you be happy or satisfied with. If the investment falls into your expectation then you can look at alternatives to pick the best one. If the rate of return is lower, then you can pass, to look at the investment when prices change. On the stock market, similar to every other type of market there are different types of buyers. Some buyers only want to be in and out or speculative buyers (hoping or expecting a takeover) others want to be in for the long term. This means prices will fluctuate and one example of it is lawsuits. In 1951, Ben Graham wrote the market undervalues a litigated claim as an asset and overvalues it as a liability. This means when companies get sued for millions the stock price typically falls, for the investor the analysis begins about the underlying business and if it still worth buying or is the price good? The classic situation is tobacco stocks which were undervalued and bounced back and return more as lawsuits were settled.

4. What to Buy and at What Price

Investing is always about alternatives and what to buy and at what price. The complication is on Wall Street there is always another stock to sell and the job of the stockbroker is to offer you ideas to place your money, ideally for the stockbroker on a relatively consistent basis. You challenge is to say no most of the time until you are offered something that means your expectations of return.

There are numerous methods to do this: Ben Graham method is try to find bargains, the classic buy summer clothes in the fall, when stores have marked them down for the fall clothes. Warren’s approach is to determine what he wants to buy in advance than the wait for it go on sale. This means do your homework and follow the companies you would love to own and wait till they fall in price – perhaps to market cycles, news, and when they hit your targets buy them. The targets are the right price and the right return on investment you are looking for.

5. The Magic of Compounding Interest

Use the power of compounding in your investments – doing so will make you more money than almost anything else you do. The secret to getting and stay rich is using compounding interest for you. The best example is Warren owns credit card companies because people pay a high rate and they have a great margin; one of your best investments is to keep your balance near or at zero. The objective is to buy a company that compounds for 30 years at 15% and pay a single tax of 35% at the end to achieve an after tax income of 13.4% annual rate of return.

Linking to dividend paying stocks, there are nothing exceptional to the above methods to investing and most of us can do it. The problem for most of us is we get captured by the possible gains we could get and say yes to alternatives when we should say no. It is hard, but discipline has to be your focus. If you can do it while you shop for your daily life, then you should be able to translate the same type of focus to your investments. One method to do that is to start with dividend paying companies which narrows the field and pick the best ones for you.

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