Warren Buffett's stock selection method

Warren Buffett's value investing strategy is key to selecting profitable stocks.

Forbes estimates that as of July 30th, Warren Buffett's net worth reached $117.4 billion, ranking him 6th on the list of the world's richest people. One of the key factors contributing to the American billionaire's immense wealth is his ability to select stocks based on value investing principles.

He selects stocks based on several factors such as stable earnings potential, a good return on equity (ROE), competent management, and a suitable price peak. Value investing strategies consider the intrinsic value of a stock rather than focusing solely on technical indicators like volume and average price. To determine a company's intrinsic value, according to Warren Buffett, investors should rely on financial reports and the metrics published in those reports.

To put his investment philosophy into practice, here are some questions the 92-year-old billionaire uses when selecting stocks.

How does the company operate?

Investors should look at ROE, or return on equity, to understand the potential return shareholders can receive from their investment. This also shows the percentage of profit investors can expect from the stock. Buffett always looks at ROE to understand how a business is performing and compare its efficiency to that of its peers. For an accurate assessment, investors should consider a company's ROE for at least 5 to 10 years.

How much debt does the company have?

A company with a high debt-to-equity ratio would not appeal to Buffett because a large portion of its revenue would go towards debt repayment. The American billionaire prefers businesses that can grow revenue from equity (SE). A company with positive equity means it can generate cash flow to cover its debts and does not rely on debt to sustain operations. Low debt and strong equity are two key elements in selecting a promising stock.

What is the profit margin?

Buffett looks for companies with good profit margins, especially those with an upward trend. Like ROE, he examines profit margins over several years to identify the trend. Companies that fall under Buffett's radar have management that effectively controls operating costs, contributing to higher annual profit margins.

What makes the company's products unique?

The American billionaire views companies that produce products that can be replaced by another business as highly risky. He believes that if a business is not different from its competitors, it is unlikely to achieve exceptional profitability.

Is the stock valuation attractive?

The key point in investing, as pointed out by Warren Buffett, is to seek out companies with strong fundamentals that are undervalued in order to find profitable opportunities.

The goal of value investors like Buffet is to identify companies that are undervalued relative to their intrinsic value. He assesses a potentially promising business based on several factors such as corporate governance and revenue potential.

Focus on investing in yourself.

Buffett has many investment principles, but one unwavering principle is investing in yourself. He emphasizes that with sufficient knowledge and experience, anyone can become a good investor. According to the 92-year-old billionaire, investing in oneself includes practicing good financial habits such as not overspending, avoiding credit card debt, saving, and reinvesting.

Thao Van (according to Investopedia )

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