How to invest like Warren Buffett - MoneyWeek Investment Tutorials

who wouldn't want to invest as successfully as Warren Buffett well not many people I suspect the so-called sage of Omaha is now an octogenarian and has been declared in the past 2008 the world's richest man chairman of Berkshire Hathaway a company that makes investments and has basically made warren buffett very rich he's famous for early-stage investments in coca-cola Gillette Amex and plenty of other household names so who wouldn't want that kind of track record and how would you go about getting it well today's video is how you can basically learn from Warren Buffett it's quite difficult to be Warren Buffett in today's market so you don't want to believe anyone who says you can be the next Warren Buffett because frankly a lot of his gains were made in the early days he's now so famous it's difficult for him to move without other investors leaping on his every word he has to time his investments quite carefully otherwise the word gets out that he's about to invest and everybody rushes in and you got a kind of self-fulfilling prophecy in a way that I don't all right when I find myself a nice little investment the only person who gets excited about it's my mum and she doesn't know anything about it anyway so how do you invest like Warren Buffett let's have a look at his key investing principles all right well not trying to turn you into Warren Buffett we're saying there are clearly some valuable lessons you can draw from his letters to shareholders over the years as to how he goes about it all right so we're going to focus on the one particular aspect of Warren Buffett's investing style it's called not surprisingly his rule number one of investing and it's very simple it's this don't lose money and being an amusing chap his rule number two of investing is see rule number one all right now the reason it matters is down to maths and then we'll talk about how you do it all right why is it so important not to lose money and it sounds ridiculous to have to prove it but it's because the losses are really really hard to recover okay just give you one example if you currently hold an investment and it drops 30% in value tomorrow morning mathematically you need it to rise 43% just to get back to where you started from alright that's the maths of losses so buff it was on to something when you said don't lose money but ok good so how do you not lose money when you buy shares and the answer to Warren Buffett was you look for good companies at cheap prices and there are two vital words that go together they're a good company at a cheap price no point in finding a bargain if it's all load of rubbish all right you don't just want cheap companies anyone can find cheap stuff that turns out to be jargon or rubbish okay what you want is good companies at a cheap price okay no point in buying a good company it is expensive if everyone else knows about it right so the key good company the cheap prices question going to focus on right now then is what makes a good company what made those coca-cola Gillette annex investments quite so successful and you can't repeat those investments tomorrow because they've been done in one sense those are much bigger companies now and maybe they're not as cheap as they once were maybe they don't have all these qualities when you go rummaging around looking for stocks trying to apply Warren Buffett's principles what is a good company as far as he's concerned well let's have a look at a few key investing lessons investing the Warren Buffett way okay so number one you want companies with a high rocky return on capital employed and low debt now high return on capital employed that means they are generating annually lots of bang per buck okay I'm not going to a lot of detail on return on capital employed in this video have a look at my related video what is return on equity but here's the concept okay lots of bang per buck in profit terms combined with low debt alright and high return on capital employed that just means if you take from a profit and loss account profit before interest and tax and put it over debt and equity capital employed that's the capital that's come from shareholders and the capital it's coming from lenders and banks so one year's profit before interest and tax over total capital employed as a percentage you get rocky so in very simple terms if that was a hundred million from the profit and loss account sterling that was 500 million adding up shareholders funds and any interest-bearing debt employed by the business one hundred over five hundred as a percentage is about twenty percent right so what a mother that your high return of capital I'd with low debt so you want this to be low so the interest bill on that debt is also low and he's after you right right an awful lot of banks for example of driven up return on equity and return on capital employed by deploying gearing dead not adding any value Warren Buffett was saying it's the value you want it's the ability to generate proper operating profits bang per buck not some kind of financial alchemy based on borrowing lots of money all right so high return on capital low debt now everyone thinking that's a bit quick on point one because it's more points to come all right take a look at my return on equity video and also have a look at my how you can make money from gearing videos and they'll explain those in a bit more detail right that's point number one he didn't get to be the world's richest man by just having one point all right so there are a few more tricks of the Warren Buffett trade if you like so there's point one point two you want to find companies with predictable earnings now warren buffett's broken his own rules a few times recently with one or two of his investments but that's beside the point predictive learnings you don't want any surprises alright you want companies they're going to be there day-in day-out a feature of his portfolio is a lot of those shares been there at all for long time these are not fly-by-night companies that suddenly gone bust he's not dot-com companies for example and Buffett famously avoided the dot-com boom and the share price rises they went with it and also the dot-com bust and the pain that went with that okay so steady predictable earnings and you want profits backed by cash flow I'll put profits equals cash flow now analysts rather grandly call this cash cover but you want to check for example that operating profits in the profit and loss account are not a kind of accounting Mirage you wanna have a look at the cash flow statement and check that the cash from operations is in line with operating profit okay cash cover is your idea there's lots of cash being generated for lots of operating profits in other words this and this bears some resemblance to each other and ruffit likes that okay he doesn't like firms where there's lots of profit being generated and virtually no cash all right for more on that see why do profitable firms go bust not by warren buffett by me all right so there's number three number four and only half dozen of these by the way he liked businesses that uncomplicated now some would say well he didn't he just invest in goldman sachs us fairly complicated some would say uncomplicated to you all right there's no absolute measure here what buffett was getting at was you must understand the business you invest in because if you don't you're just playing a lottery if you have no idea how the directors are doing it what if they stop doing it alright you're stuffed okay so fine business is that you understand all right a lot of people on this point to make didn't have any clue how calm companies were ever going to make profits all right let alone generate cash flow and Buffett's point was the business doesn't have to be hugely complicated or hugely simple the fact is you've got to understand how it's doing what it does okay if you're an expert in financial derivatives you understand those businesses you can invest in them if you're not you probably don't want to bother all right so uncomplicated as far as you're concerned all right good example no Gillette one of them buffets early investments as a product everyone understands and as a product everyone's probably seen okay same with coca-cola right um then you want a strong brand coupled with pricing power now I'm going to use Gillette razor blades as an example or the ink cartridge I recently bought for my printer at home as another example of what Buffett means lots of things have gone down in price in recent years thanks to the Chinese clothing springs to mind CDs but anyone who shaves using Gillette razor blades like me will know somehow they managed to keep pulling off a remarkable trick the price of those razor blades seems to keep going up the little thing you attach them to doesn't that's cheap but the business multiples clever all right the price of those razor blades keeps creeping up by the way they do that partly as they say well you were shaving with two now have three okay so I'll pay more for those all right so they've got their ways of making sure than even in a recession they maintain pricing power same with people quite often who make replenishment cartridges for printers the printer is cheap try and third up the anything and you end up paying an arm and a leg an you think this is more expensive than was 12 months course going on where's the tech revolution here right those are clever business models and those are the sorts of things that Buffett was talking about pricing power you can't suddenly just be undercut and who can't suddenly be undercut strong brands but you're more likely not to be suddenly undercut if you've got that of a brand power and wrap it Buffett likes brand names okay you know even in the Fletcher Investment mark gaming goldman sachs love them although them has quite a brand name okay now final point there are there are others we could make but management need to be owners of the business not hundred percent alright it's often not possible when a stocks listed for example I mean if they 100 percent how would you ever buy into it but the point is management's need to have a high stake in the future of the business all right now there's no science to this is a little bit art and science there are two extremes that it comes to paying managers you can pay them all cash give a massive salary or you can play them no salary and give them all shares and share options those are the two extremes all right and both have their drawbacks pay managers all in cash with no shares or share options in the business you want to buy into they're just going to do what they need to do to earn their salary and nothing more goes the argument give them all shares and share options and all well do is try and boost the share price very short-term cash in and get out all right so you so those two extremes often won't work as attractive they might seem superficially so there is obviously a middle ground here but what you don't really want is management not prepared to back their own decisions with their own hard cash okay so all companies take a look at the arrangement the directors are they required to put a certain amount a percentage of a year's salary or something into shares by a certain time in what's the management scheme that gets them into buying shares in the company because if they own some shares at least they're likely to be more committed to doing what you want them to do which is raise the share price not just collect their salary go home fix it I mean right there's the bond with bonuses as well you know a bonus is fine doesn't help you as a shoulder all right you know a bonus doesn't have to have anything to do with share price increases look at banks recently it can simply be part of the benefits negotiated by uptaking director all right so what Buffett said make sure that the managers are to some extent owners of the business you're buying into all right so they have it when you're buying shares half a dozen key invest like Buffett tips well these half dozen tips turn you in to Warren Buffett no there are historical reasons why he's the greatest investor of all the time even he's found it more difficult to make money recently almost by by dint of who he is okay but these will help you benefit from all of that cumulative investing knowledge and experience and that is the way that Warren Buffett can help you in your day to day investing decisions

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Keywords: Buffett, stocks, picks, investor, Investing, ratio, stocks/shares, Cash, flow, Overtrading, market, firms, profit, loss, Share, trading, shares, traded, Liquidity, Bid, offer, spreads, rate, MoneyWeek, Investment, Tutorial, Currency, Central, bank, finance, credit, 'stock, market', investments, tutorials, Trading, Stocks, Analysis, Trade, Tim, Bennett, Economy, white, board, explained, Financial, Technical, Bloomberg, Warren Buffett (Organization Leader), Business, Forex, Educational Film (Film Genre), Credit (Industry), Futures, Markets

Id: Nbiib0IBGZY

Length: 13min 2sec (782 seconds)

Published: Wed Feb 22 2012