I was reading a French Newspaper the other day and the journalist mentioned that we needed to go back to the

basics of investing. That we need to forget about the volatility and our emotions and that we need to follow the good ol common sense. In order to invest intelligently, he suggested 4 investing principles that Warren Buffett has used during all these years to become the most prosperous investor of all time. You know what? Buffett doesnt bring his laptop with his complicated investing formulas and doesnt show 10 thousand graphs with moving averages and delta, sigma and the rest of the Greek alphabet. He simply looks at easy-to-understand investment basics: #1 Quality Regardless if a stock is the flavour or the month or not (you know, the stocks you keep hearing on the news every week as they used to do with RIM which has been replaced with Apple?), you need to aim for quality companies. Quality means: - good products - good services - good management team - good financial structure - good potential - good, good, good. You need to make sure that the company is not only good today but it has given itself the means to be good for a long time. This is what we call good quality stocks. #2 Growth vs Profitability Growth is nice but can the sector still be profitable once many competitors enter? Sometimes, we might be tempted to invest in a company that is the first in its niche. That we think the growth is there for the next 10 years. But what happen when everybody knows that the growth is going to be in a specific sector? A ton of competitors, copies arise like weeds in spring and the price drops. Therefore, will there be enough room for everyone to make good money after a few years? #3 Risk of loss first Buffett says that he looks at the worst case scenario at any time before investing. Therefore, he makes sure to know what his potential losses are. This is also why they keep 20G$ in liquidity in Berkshire. They dont make much on this cash sitting in the money market but they are sure to avoid depending on anybody else. They know they can go through a rough economic stretch. This is the kind of guy that will never be caught out by a sudden drop in the economy. The funny thing is that when I invest in a stock, I usually think about the potential gains I can make and completely put the potential losses aside. I tell myself I am young and that I have enough time to make it right Maybe I should realign my investment strategies with Buffetts practices.

I actually did it once when I sold my Smith Man oeuvre portfolio back in May 2009 knowing that I was probably leaving a lot of money on the table but I also knew that I couldnt stand more risk since my wife was quitting her job and we needed liquidity as a backup more than potential gains on paper! #4 Disciplined Attitudes Definitely, the most common and ignored investment advice: follow your investment strategy, not your emotions when investing! Stay disciplined and never sell when there is a wind of panic hitting Wall Street. I have often run into clients who want to buy when its high and sell when its low Unfortunately, we all want to make money when we see others doing well and we dont want to be the only loser in the market Overall, I think I am way more aggressive than Warren Buffett but I also think that his basic investment advice is gold. Everyone should keep these 4 investment tips in mind before each trade they make! Warren Buffet's Six Investment Principles So how does he do it, buying companies and investing on the cheap? Well in short, he keeps it as simple as possible and he's incredibly patient, moving only when the markets are so far in his favor that he can hardly lose. And of numerous books have been written about him, a few of his many tenets for successful investing stand out. These are a few of them; investment questions that when answered properly have helped Buffet cement his reputation as the best in the business. They are:


Has the company's performance been consistently good?-Buffett's tool in this regard is return on equity or ROE. Return on equity is a company's net income divided by shareholders equity (book value). Buffett uses ROE as a measure of company has consistently performed over time vs. its peers. A good ROE in this regard would be a 5 yr. average between 15-17 percent. Does the company carry too much debt compared to its peers? ---The measure of debt Buffett uses in evaluation is the debt/equity ratio. Buffett, in general, frowns upon companies with high levels of debt. Instead he prefers that earnings growth is generated by shareholder equity as opposed to borrowed funds. In this case, the higher the ratio, the more debt that a company carries. And while this figure varies from industry to industry, a good way to measure it would be by looking for a ratio that is less than 80% of the industry average.

Are profit margins high compared to its peers? Are they increasing?-Buffett looks for companies with above average profit margins. It's calculated by dividing the net income by the net sales. Companies with a strong history in this regard over an extended

period of 5-10 years typically outperform. An above average performer will typically carry profit margins that are 20% above the industry average. Moreover, those same profit margins will tend to rise as the company becomes more efficient over time.


How long has the company been public? -In general, Buffett typically only considers companies that have been around for at least 10 years. That gives them the historical track record to make a proper evaluation of the company's future prospects. Are the company's products vulnerable to "commodity pricing"?-Buffett is a strong believer in the economic moat. Therefore, if the company doesn't offer anything that is unique or substantially different from its competitors he's generally not interested. And finally, is the company cheap on a valuation level? This is the part of the Buffett magic that is hard to quantify because it deals with a company's intrinsic value. That's the value that goes beyond its liquidation value and includes all the many intangibles that are hard to put a figure on, such as the worth of a brand name. In general, Buffet will want to purchase a company that is available at a 25% discount to its intrinsic value.

These, of course, are just a few of the many ways that Warren Buffet has built up his massive portfolio over the years. That's because to a large extent, Buffet never buys stocks, he buys companies. The difference between these two styles has not only made him wealthy, but has also made him the best brand on the market today. When he speaks, the markets follow. By the way, Warren is not only patient, but also prophetic. Here's a link to an interview that he and his partner Charlie Munger gave CNN/Money almost three years ago entitled: The Oracle Speaks. It's an interesting read to say the least from two pretty smart guys. In fact, you could say that they saw today's market troubles from a mile away. Wishing you happiness, health and wealth,

Warren Buffett does not readily disclose the investments he makes on behalf of himself or Berkshire Hathaway. He does, every year, report on the substantial holdings of his company in other corporations. These provide only tiny clues however to why, when and where he invests. He is prepared, however, and does so regularly, to outline general principles of sound investment. These have a consistent theme and can be summed up like this. Stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business the Benjamin Graham approach: 1. The company should be soundly managed. Tests of good management include:

y y y

Share buybacks Good use of retained earnings Sticking to what you know

2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
y y y y y

Company growth Dealing with inflation Capital expenditure Look through earnings Brand names

3. The company should have consistently high returns. Warren Buffett would look at both:
y y

Returns on equity Returns on capital

4. The company should have a prudent approach to debt. 5. The businesses of the company should be simple and the investor should have an understanding of the company. See case studies 6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
y y y y

Price/earnings ratios Earnings and Dividend yields Book value Comparative rates of return

8. Investors need to take a long term approach.

In 1965, an investor took control of a ten thousand dollar investment in Berkshire Hathaway. The same investment grew and was worth thirty million dollars in 2005. That investor is Warren Buffett. Warren Buffett is considered a genius in money investment. His investment principles are the most successful in the field. In fact, the same principles have made him able to compound his investments for over 20% per annum for more than forty years. His capability to see a company's overall potential and sees how much money the company can make as a business. Warren Buffett achieved his success by applying his six money investment principles. He keeps it as simple as possible by waiting patiently and investing on companies other investors would think of as cheap. He makes his move only after seeing that the market moves in his favor so he avoids losses. His money investment principles are actually questions that he asks himself before he invests on a company and these are:

1. Has this company performed well consistently? Warren Buffett keeps a close eye on a company's Return on Equity (ROE). The ROE shows how much the investors are earning from their shares in the company. He uses the company's ROE as a gauge in assessing if the company has done well compared to others in the same league. ROE is computed with the following formula: = Net Income / Shareholder's Equity. A company that is doing well should have an average ROE between 15-17% at a five year period. 2. Does the company have excess debt compared to others in the same league? Warren Buffett prefers a company that has less debt so that the profits earned will obviously come from shareholders' equity and not from the loaned money. He calculates debt/equity ratio with the following formula: = Total Liabilities/Shareholders' Equity. The higher the ratio, the higher the debt is. The best debt/equity ratio should be less than 80%. 3. Are the company's profit margins high and are they increasing? Warren Buffett computes a company's average profit margin by dividing the net income by the net sales. The company should not only have less debt but should also be able to consistently increase the profit margin. The profit margin for the last five years is looked at. It is in increasing, it only shows that the company is doing well at managing the resources and lessening the expenses. 4. How long has the company been in public? The company should at least be one that has been around for more than ten years. Longevity shows how a company withstands the test of time and that is important for Warren Buffett. 5. Will commodity pricing affect the company? Warren Buffett only invests in companies that are able to offer something new and unique. He believes in economic moat or competitive advantage. 6. Is the company available at a 25% less than its intrinsic value? Warren Buffett carefully studies a company's earnings, revenues, and assets to get a bird's eye view of its intrinsic value. Warren Buffett's money investment principles have touched many investors because they are simple and down-to-earth like how he maintains himself. Even with a simple lifestyle, he is considered as the second richest man in the world as of 2004.

Warren Buffett's Investment Principles 1. When you make investment, please know the company well and be sure the company is good managed and has great potential in the future. Here are several factors to test a good management: Share buybacks Good use of retained earnings Sticking to what you know 2. If you want to choose a stock, be sure the company could demonstrate its earning capacity, which can be continued. Here are some factors you should consider for its earning capacity: Company growth Dealing with inflation Capital expenditure Look through earnings Brand names 3. If a company does not have consistently high returns, you can ignore it. In order to know whether

a company has high returns, Warren Buffett would look at both: Returns on equity Returns on capital 4. When it comes to the debt, Warren Buffett always considers those companies which have low debt, just in case the safety of investment. 5. The businesses of the company should be simple and the investor could understand it.

6. If the company can satisfy you with all the factors above, you may consider buy its shares. However, before purchasing its stock shares, youd better consider its price. Do not make purchase at a high price. Otherwise, you are going to lose your money. Remember, you should always remember the margin of safety and purchase your stock shares at a rather price. Before purchasing, you should consider these factors: Price/earnings ratios Earnings and Dividend yields Book value Comparative rates of return 7. Investors need to take a long term approach rather than a short term investment.