You may already know that Warren Buffett repeatedly stated in his Berkshire Hathaway letters that there will be no Warren Buffet recommendations on stock picks. Since this is the case, the best is to learn from Warren Buffett is his investment philosophy from the available Warren Buffett books.
“The New Buffettology” which was authored by both Mary Buffett (ex-Warren Buffett’s Daughter-In-Law) and David Clark back in 2002 is so far the best selling Warren Buffett book based on modern context. To help you out, we summarise 12 key points out from this Warren Buffett Book as follows:
- First determine what you want to own, then wait for a good price. The price you pay determines your rate of return.
- Knowing what stocks you want to own and then wait for a good entry price to enter.
- To be able to determine your rate of return, earnings and profitability should not only be above-average, but also predictable.
- Knowing your above average rate of return, earnings and profitability in a predictable way
- Warren Buffett does not calculate the intrinsic value and then buys at half that price. Instead, he calculates the Expected Annual Compounding Rate of Return, compares it with other available investments, and buys the best one.
- Warren Buffett does not care to buy stocks way below the intrinsic value of the stocks. He decides to buy a stock based on the Expected Annual Compounding Rate of Return, then compares it with other available investments and buys the best one.
- Only buy a company if it has excellent and consistent business economics, and the Expected Annual Compounding Rate of Return is 15% or higher, then hold on to the stock for as long as possible to maximize compounding.
- Invest a company only if its business has a proven and consistent track record and the Expected Annual Compounding Rate of Return is greater than 15%. Once the Warren Buffett stocks are invested, hold on to these stocks for as long as possible to maximize compounding.
- Compounding over a long time so as to save on taxes and transaction fees
- Hold on to a great business with a predictable, consistent 20% return over a quick 35% gain even if these stocks are trading above their intrinsic values. This is because a great business is hard to find and selling of such good businesses may imply tax payments.
- Good businesses with market monopoly or having sustainable competitive advantages are the key to long-term, consistent, above-average returns on the stock market.
- Compounding is the #1 secret to getting really rich -> Compound long and hard, with minimum taxes and fees. So limit your number of transactions.
- Invest in dividend stocks only if the company has low returns on equity or having little growth prospects.
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