BusinessNews Publishing - Summary: How to Pick Stocks Like Warren Buffett: Review and Analysis of Vicks Book

Book Abstract

Warren Buffetts track record as an investor speaks for itself he quite simply has no equals.

So how does he pick which stocks to invest in? The core strategy he uses is built around four clear and consistent principles:

• Have the right investment philosophy which will encompass everything from a long-term viewpoint to a feel for the numbers.
• Analyze potential investments astutely looking at earnings, return-on-equity and book value rather than stock price.
• Avoid getting into a loss situation carefully and judiciously
• Take into account and follow the general rules of good investment strategy a mindset more than anything else.

Clearly, then, any investor aspiring to emulate Buffetts results must first attempt to understand why he picks some stocks to invest in and not others. As Warren Buffett himself has stated on a number of occasions, investing doesnt have to be a difficult or complicated activity so long as you are prepared to develop the right kind of intellectual framework.

About the Author

TIMOTHY VICK is a senior analyst with Arbor Capital Management. He is also the founder and former editor in chief of Todays Value Investor , a market newsletter. Mr. Vick is the author of Wall Street on Sale How to Beat the Market as a Value Investor . He also serves as a business consultant in the valuation and strategic planning specialties. Mr. Vick is a graduate of Purdue University.

Important Note About This Ebook

This is a summary and not a critique or a review of the book. It does not offer judgment or opinion on the content of the book. This summary may not be organized chapter-wise but is an overview of the main ideas, viewpoints and arguments from the book as a whole. This means that the organization of this summary is not a representation of the book.

Principle #1: Have a Street Smart Investment Philosophy.

Warren Buffett excels at holding stocks for a long period of time, resisting the urge to trade incessantly. His main rationale for such a long time frame is that while there may be short term inconsistencies, over the long run, there must be a perfect correlation between price and value.

No force exerts more influence over the growth in value of a stock portfolio as time. Therefore, smart investors wait patiently and let time work to their advantage by choosing good companies and then waiting for the stock price to steadily increase to match the growth in earnings of the company.

Compounding also amplifies the benefit of beating the market. If the general market is advancing at 10-percent per year and an investor puts together a portfolio which performs just another 2-to 3-percent more per year, the end result after 30 or more years of compound growth is very large.

Time is the friend of the good business, the enemy of the poor.

Warren Buffet

Watching great companies increase their sales and earnings consistently is a dream come true for an investor. Strong enterprises see their intrinsic value rise consistently, lifting the stock every step of the way. The power of compounding begins working its magic as the years progress and allows your net worth to gather momentum and increase (in dollar value) by greater and greater amounts.

Timothy Vick

The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.

Warren Buffet

To enhance investment returns beyond the general markets performance, Warren Buffet uses three specific strategies:

1. Buy stocks only when their market price is below the actual value of that company because these stocks will have the greatest rate of growth in the years ahead.
2. Buy stocks in only as many companies as you can realistically keep watch on their financial performance which will invariably mean investing in at most 10 - 15 stocks.
3. Eliminate all unnecessary costs by minimizing commissions, avoiding frequent trades and automatically reinvesting dividends.

These three points are very simple and common sense, yet it is surprising how many investors ignore them and make things more difficult for themselves.

The investor who can rationally size up a companys prospects and be ready to pounce when the quote is right possesses an insurmountable advantage over investors who follow each others lead.

Timothy Vick

Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put too little into companies they thoroughly know and far too much into others about which they know nothing at all. It never seems to occur to them that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.

Warren Buffett

I put heavy weight on certainty. If you do that, the whole idea of a risk factor doesnt make any sense to me. You dont invest where you take a significant risk. But its not risky to buy securities at a fraction of what theyre worth.

Warren Buffett

Warren Buffet avoids short term trading activities with a passion. To him, the ideal holding period is indefinitely and rapid trading wastes money that could otherwise be applied to building wealth.

By buying-and-holding stock, not only are transaction costs eliminated but continuity in evaluation methods exists. Theres no need to develop new ways to measure growth in value, and progress can be determined quite simply using year-to-year measurements.

Most of our large positions are going to be held for many years, and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by the prospective near-term earnings when purchasing small pieces of a company.

Warren Buffett

In the real world, investors have a habit of wanting to change chairs, or at least getting advice as to whether they should, and that costs money big money. My estimate is that investors in American stocks pay out well over $100 billion a year to move around on those chairs or to buy advice whether they should! In other words, investors are dissipating almost a third of everything the Fortune 500 is earning for them by handing it over to various types of chair changing and chair-advisory helpers.

Warren Buffett

Our goal is to have our shareholder-partners profit from the achievements of the business rather than from the foolish behavior of their co-owners.

Warren Buffett

I am a better investor because I am a businessman, and a better businessman because I am an investor.

Warren Buffett

Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Feds policy on money supply, foreign investment, the movement of the constellations through the heavens and the moss on oak trees, and they cant predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.