Matthew R. Kratter - Invest Like Warren Buffett: Powerful Strategies for Building Wealth

Invest Like Warren Buffett

Powerful Strategies for Building Wealth

Second Edition

Matthew R. Kratter

www.trader.university

Copyright 2016 by Little Cash Machines LLC

All rights reserved. No part of this book may be reproduced in any form without written permission from the author (). Reviewers may quote brief passages in reviews.

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Disclaimer

Neither Little Cash Machines LLC, nor any of its directors, officers, shareholders, personnel, representatives, agents, or independent contractors (collectively, the Operator Parties) are licensed financial advisers, registered investment advisers, or registered broker-dealers. None of the Operator Parties are providing investment, financial, legal, or tax advice, and nothing in this book or at www.Trader.University (henceforth, the Site) should be construed as such by you. This book and the Site should be used as educational tools only and are not replacements for professional investment advice. The full disclaimer can be found at the end of this book.

Table of Contents

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Chapter 1: Why Investing is Easier for You than Warren Buffett

Warren Buffett is the worlds greatest investor. He began his investment career at the age of 11, buying $114 worth of stock. Seventy-three years later, his net worth is almost $70 billion.

How did he do it?

And, more importantly, what can we learn from Buffetts investment strategy that we can use to make money for ourselves?

There are many things that Buffett does that you and I will never be able to imitate. You and I will never purchase an insurance company and invest the float. You and I will never get a phone call from Goldman Sachs, offering us preferred shares with a 10% dividend yield.

On the other hand, the individual investor has many advantages over Buffett. Buffett is currently sitting on over $50 billion in cash that he needs to put to work. Because of the size of this cash pile, Buffett is limited to investing in only the largest companies. And when he buys a stock, he needs to move slowly, to avoid moving the market.

You and I can quickly buy almost any stock, without rumors swirling and moving the price of the stock. We can buy stock in a company of any size, from a micro-cap to a mega cap. We can buy the kind of smaller and faster-growing companies that Buffett was able to buy in his early investing days, but no longer. And we can sell our shares, if and when we choose.

In 1999, Buffett wanted to sell his shares of Coke, which were sporting a lofty average P/E of 47. He was unable to sell for two reasons. One, he was on the board of directors at Coke. Two, his position was too large to be able to make a graceful exit.

You and I will never have these constraints. We are free to learn from the best of Buffetts investment insights, while operating under the radar.

I have studied Warren Buffett and his investments for over 20 years. I have read all of his annual Berkshire letters. Over time, I have tried to distill Buffetts most valuable investing insights.

If I had to summarize Buffetts main investment strategy in one sentence, it would be this:

Buy shares in a few high-quality, well-run businesses at a fair price, and then hold them forever.

Buffett has been preaching and teaching this investment philosophy for the last 40 years. The secret is hidden in plain view. And yet so few investors have put it into practice, even while they have watched Buffetts wealth compound year after year.

The strategy seems too simple to actually work.

Yet, as Buffett reminds us: There seems to be some perverse human characteristic that likes to make easy things difficult.

And elsewhere: I dont look to jump over 7-foot bars; I look around for 1-foot bars that I can step over.

In this book, you will learn how to find those 1-foot bars, so that you can step over them, too.

Its not as exciting as jumping over 7-foot bars, but I hope that you will find it even more financially rewarding.

To implement Buffetts investment strategy, you must first learn how to spot a high-quality business (covered in chapters ).

Next, in , you will learn how much you should pay for a stock.

And finally, in , you will learn about some of the best times to buy stocks.

Before we move on, it is important to remember that for Buffett, stocks are not just pieces of paper, or wiggles on a stock chart. Rather, they are ownership interests in real-world businesses that entitle you to a share of the present and future profits of those businesses.

When you purchase a stock, you become a part-owner in that business.

After you purchase a stock, it may move up, or it may move sharply down. Your ownership and your share of the profits and dividends remain, no matter what happens to the stock price.

If the business continues to do well over time (and provided that you paid a reasonable price for your shares), you will make money.

It is now time to learn what constitutes a high-quality business.

Chapter 2: What a Not-So-Great Business Looks Like

For Buffett, the world is divided into 2 kinds of businesses:

1. Great businesses
2. Everything else

Buffett believes that you should spend most of your time focusing on the former, and ignoring the latter. Time and money are too valuable to waste on researching or investing in a sub-par business.

To understand what constitutes a great business, it might help to first think about what a not-so-great business looks like.

Staples (paper fasteners).

Have you ever thought about the design of the staples in your stapler? Do you have a favorite brand of staples? Do you lay awake at night thinking about when staples 2.0 are going to be released?

Probably not.

When youre at the office supplies store, or on Amazon, you probably buy whatever is available and cheapest.

Staples are a commodity. Lots of different companies make them, but none of those companies really stand out. Have you ever heard of SwingLine, Advantus, PaperPro, Max, or Rapid? I didnt think so.

Manufacturing staples is a price-competitive business. The manufacturer that can produce them at the lowest cost will gain market share. If someone figures out how to make a cheaper staple, the majority of the cost savings will be passed on to the customer.

Staples for paper staplers are made from zinc-plated steel wires that are glued together. The cost of making them is determined by the materials (zinc, steel, glue) and labor (China, Philippines). Whoever can procure the cheapest materials and the cheapest labor will be able to produce the cheapest staples.

I cannot prove it, but I would guess that staples, on an inflation-adjusted basis, have actually gone down in price over time. The price of the raw materials has gone up, but the efficiency of the machines that make them has probably compensated for it (the first staples were probably made by hand).

This is what a not-so-great business looks like. It produces a commodity product in a highly fragmented and competitive marketplace. The company has little to no brand recognition, and no pricing power any cost savings end up accruing to the customer, rather than to the owner of the business.