Warren Buffett. His Billions Started Like This...

His Life

At 11 years old Warren Buffett made his first stock purchase. He bought nine shares of Cities Services at $38.25 each. He sold them when the price reached $40. A few years later the stock rose to $200. So this is what “buy and hold” means he thought.

After several years of entrepreneurial adventures he went to Wharton and University of Nebraska. While doing graduate work at Columbia Business School he met Benjamin Graham; father of securities analysis. Benjamin Graham had a profound influence on Warren Buffett’s life. Not to mention, his wallet.

His Lessons

While researching the investing strategies of Warren Buffett, I found it’s easier to find his guiding principles than the numbers he uses to prune his stock list. If you have the patience, don’t mind buying a stock and holding it, you too could be on your way to $40 billion.

Before we get into his stock picking strategies, Warren Buffett’s $40 billion is not all from stock picking. He buys companies. Much of his wealth comes from the revenue generated by these companies. If you end up making a little less money than Warren, you still did pretty well.

Start early. A component of Buffett’s wealth is derived from compounding interest. The earlier you start investing, the stronger the interest factor. Buy low, sell high. This seems to contradict some of the traders we profiled here. They like to buy high, and then sell higher. Warren operates differently.

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When is a good time to buy stocks? As long as your analysis proves it’s a good company, and for some reason, the price is low. You’ll make money on the way up. And yes, that may be a while.

Warren Buffett feels the savvy investor should be loading up the truck while others are panicking. Their selling mania will make the stock market seem like it's an after-Christmas sale.

Focus in on one or two industries. Get to know the business and the players. Start following the leaders and their stock price. When the price seems cheap, buy it & hold it. I know. It’s seems so easy there’s got to be a catch. There is. It’s called time. And doing the proper analysis to ensure the company is financially sound. Ok, you don't need to do that much analysis. Just pick up Investors Business Daily and use their rankings as a cheat-sheet.

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Over time the price of any stock will find its intrinsic value. If you find a profitable company with great earnings potential, and the stock appears undervalued, buy it. Finding situations like this not easy. Wall Street has it's computers programmed to hunt for stocks like this.

The question that makes investors impatient is, “When is it going to go up?” You don’t know. But when it does, you will earn more return than traders who buy and sell several times per week. You’ll make more because you not looking to grab a few points on a quick trade. You’ll save more because you’re not spending on commission charges and paying a higher tax rate.

The Dow will go down, oil will go up, the Fed will lower interest rates and your stock will gyrate. Should you care? No. You're buying a piece of a business. The only thing you should care about is if the company is making money.

When Warren Buffett finds a company that meets his requirements:

• He understands the business and the industry. H favors low-tech stocks.

• Financially speaking they have good long term prospects.

• Management is effective, honest and wants the best for the company.

• The price is cheap.

• The debt level must be low. But this can vary between different industries.

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Then we move on to the math part of the equation.

We simply figure out what the future earnings are worth today. With the help of a calculator, Present Value table or somebody really smart,we discount those cash flows from the future to today’s value. We determine if the return matches or surpasses the rate we want.

Warren Buffett uses ROE (Return On Equity) to figure a company’s profitably and ROC (Return On Capital) to filter out high debt stocks.

A company cannot internally fund earnings growth quicker than the ROE rate...unless it sells more shares or borrows more money. These are two situations Warren does not like. What is a good ROE rate to look for? I’ve read at least 15%.

The companies with the best profit margins are the most profitable. But compare pre-tax margins since companies may be paying different tax rates.

Warren Buffett’s portfolio consists of finance companies, consumer products, entertainment and media. If you heard of it, use the product, and your grandma understands it, Warren probably considered it.

You probably have a list of good companies that would be considered a Buffett stock. The next step would be to put them on your watch list and wait. When the price comes down and all around you is yelling 'sell'...you may want to buy. As long as the fundamentals are still good.

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As of the time of this writing, credit woes and hedge fund problems pounded financial stocks. Goldman Sachs took a big hit too. Is the stock price doomed? Of course not. This company knows how to make money and invent money. They hire the smartest minds on Wall Street and pay them boatloads of money. They use the best technology available to move money from Point A to Point B and double the value on the return trip.

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The demand for their services will never end as long as there are companies that want to grow and raise cash. The world is their customer base. This stock will rise like the Phoenix and you won’t have to wait years for it to happen.

Is this a Warren Buffett stock? Maybe, maybe not. Only time will tell as of today. But of this I'm sure; it's Goldman Sachs and it's on sale right now.

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