If I’m planning to grow my personal wealth, I want to follow investors like Warren Buffett. You see, when I want to improve my fitness, I don’t listen to people who eat McDonald’s every day, or avoid running. So why would I follow investors who lose money year after year? If I want to pick stocks like the best, I have to listen to the best. And not just listen. But also try to put those lessons into practice.
Billionaire Warren Buffett has a few simple ways to build huge wealth over time. I’ll lay out the easiest of those principles here today.
Warren Buffett: buy strong returns
Buying shares in a company effectively gives me a specific claim on that company’s future cash flow. So I want to have that obligation coming from a consistently profitable company. And one that produces a good return on investment.
Warren Buffett always looks at a measurement called ROE (Return on Equity) when picking stocks. It tracks how well a company makes profits on the money that shareholders invest by buying its shares.
Any company with an ROE in double figures is considered good. Mr Buffett doesn’t just look at this quarter, or this year, but goes back five or 10 years in a row. A high ROE suggests a good return on investment.
I can work out ROE myself with a calculator by dividing a company’s annual net profit by its equity, or apps like Stockopedia can do it for me.
Market share
One of Warren Buffett’s favourite indicators is the ‘competitive moat’.
Just look at the top two companies owned by the company he runs Berkshire Hathaway. They are Apple and Coca-Cola. And a recent buy is pharmaceutical giant Merck and Co.
His favourite stock picks must control a large market share.
That can be with high-value intellectual property in the form of brands (like the iPhone, or Coke Zero) that no-one else can legally sell. The bigger the moat, the harder it is for a competing business to take market share away.
On the FTSE 100, I think examples like this include GlaxoSmithKline, which owns a lot of patents and trademarks to drugs only it can sell.
Buy cheap and hold
Warren Buffett’s key stock picking method is buying undervalued companies.
That means picking up shares in good quality but ignored blue-chip companies whose stock price has fallen for various reasons. Then he simply sits on that investment and waits for the market to come back and accurately value it again.
It’s not guaranteed to pay off, of course, as even Warren Buffett has picked some companies or sectors that have underperformed. But he’s successful more often than not.
And then he gives his investments time to grow. You see, the beauty of the Warren Buffett stock-picking strategy is that it plays out over many years.
So the first part of the equation is researching to find historically profitable companies that also have high revenues and are market leaders in their field.
Then comes the holding part, which is actually is the hardest. I know from experience. Easy-access investing apps don’t make it particularly easy to ignore my investment portfolio once I’ve done my research and made my decision. But this is the Warren Buffett way.
