Warren Buffet’s advice in relation to investing in stocks is considered to be highly valuable as the principle on which his investment is based has always resulted in beneficial results. Warren Buffet states that an investor must invest in stocks of a company that has relatively straight forward products and services. It is highly essential that an investor must understand the business that the company is dealing with so that s/he is easily able to follow the financial and non-financial position of the company. It is highly important that before an investment takes places, an investor must analyze the essentials of the company and perform a complete analysis in order to determine the current value of stock and the future prospects of the company.
An analyzing stock, Warren Buffet states that an investor must calculate the intrinsic value of the stock that is the present value of all the future net cash inflows associated with the stock. This includes the dividends and capital gains that would be realized over the period of investment which is termed as five years at a minimum. The intrinsic value would also help in determining whether the stock is undervalued or overvalued. Warren buffet argues that an investor must invest in stocks that are undervalued so that capital gains could be realized when the market value appreciates and correlates with the intrinsic value of the stock.
Warren Buffet states that an investor must avoid stocks that offer high financial gearing as debt results in higher financial risk within the company. The company analysis must focus on return on equity and the gross profit and net profit margin generated in recent years in order to assess the profitability and viability of the organization. It is always preferable to invest in companies that have a monopoly or competitive advantage over other companies within the industry. This would result in the stock to remain relatively stable over a period of time despite changes in selling prices or economic conditions. This is due to the fact that monopoly companies are able to exploit the target market and take advantage of economies of scale without hampering profitability.
Thus, the basic stock tip offered by of the Warren Buffet Book is that an investor must analyze the company before going ahead and buying the stocks. This allows the investor to understand the fundamentals of the company and judge the future stream of dividends associated with the stock. An investor must only invest in those companies that he truly understands and refrain from high diversification. Instead an investor must analyze a few companies and continue to invest in them in order to generate gains. Although diversification is said to reduce the systematic risk associated with stocks, Warren Buffet argues that diversification results in overall lower returns. The stock tip of Warren Buffet is to analyze a company before hand and invest only if the intrinsic value is high enough. If the stock results in sufficient gains, then an investor must continue to invest in the same stocks rather than diversify towards other stocks available in the market.
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