Lesson 1: basics of investing (Warren Buffets)

Warren buffet 4 rules of buying stocks

Warren buffet keep things simple, he likes to focus on the fundamentals
1) A stock must be stable and understandable
a. A co with same earnings year in and year out
b. Dont invest in a company which is not stable and cant be
understood
2) A stock must have long term prospects
3) A stock must be managed by vigilant leaders
a. A co has to be like that it can manage debt well
4) A stock must be undervalued
a. He never buys a stock which is overvalued

A stock must be undervalued

A quick valuation tools

1) Market price
2) Earnings
3) Book value
PRICE TO EARNING RATIO
If P/E is low, returns are going to be high implying that the margin of safety will
works
PRICE TO BOOKVALUE RATIO
P/BV= $10/$0.70
P/BV=14.3
This means that every 14.3 dollars paid
Value

P/E should be 15 or low

P/BV should be 1.5 or low

for this company has $1 in Book

PRICE

EARNINGS

BOOKVALUE

P/E<15

P/BV<1.5
15*1.5=22.5

Therefore, if P/E*P/BV<22.5
Then this is accompany one should look at
Overvalued companies has no margin of safety, so try to avoid them
His thoughts:
The market is nothing but a place where you go to buy or sell stocks
I buy on the assumption that they could close the market tomorrow and not
reopen it for 5 years-warren buffet
Some days you will get offered great buys, and other days you will get
offered horrible deals, your job is to know when its a bad deal
PATIENCE:
Anytime you find something that looks like massive returns means massive risk
Pigs get fat and hogs get slaughtered
Patience is truly a virtue. Take your time and dont try to get rich overnight. Never
try to break your rules.
INDIVIDUALITY:
Think for yourself- thats what all the great investors do
Ive often found that if I was doing what everyone else was doing, I was probably
doing it wrong