Warren Buffett is one of the wealthiest men in the world because he is a smart investor. Although he is an investment giant, Buffet rarely participates in interviews because his strategy contradicts traditional ideas. In many cases, he discourages the use of brokers, analysts, and advice from financial “experts.” How Buffett Does It explains the simple strategy that he used to build his wealth, and how anyone can use the same principles. If you’re willing to practice long-term retention your stock, Buffett’s advice is for you. If, however, you want to be a better day trader, or you want a hot stock tip, this book is definitely not for you.
James Pardoe provides 24 of Buffett’s investing strategies with one common theme: Become a value investor when purchasing stock. Too many people want to buy low and sell high. Everyone seeks low-priced stock, hoping that the price will rise. Buffett’s message is to pay attention to the price and even more attention to the value. The dot-com bust is a great illustration of such a concept. Investors were buying dot-com stock based on the action of the stock rather than on the quality of the business that the stock represented. Buffett refused to buy a single Internet stock, as he considered it a “gold rush” and a business he did not truly understand.
Warren Buffet has four main criteria for buying stock (Pardoe, p. 33):
- Business he can understand
- Companies with favorable long-term prospects
- Business operated by honest and competent people
- Business priced very attractively
Buffet refers to these standards as his “circle of competence,” and he states that deviating from them will hurt you in the long run. First, you should buy a business that is easy to understand because the cash flows are easier to predict. Second, buy business stock that has enduring competitive advantages and products that dominate their markets. To illustrate such businesses, Buffett equates this type of company to a castle with a moat. You are looking for companies that deliver consistent earnings and revenue growth year after year. While many are searching for the company that will be a pioneer in its industry, Buffett advises you to look for the absence of change. Further, look for the business whose only change in the future will be doing more business. Finally, he states, “When it comes to price, you want to buy the dollar bill that is selling for forty cents on the stock market” (Pardoe , p. 123).
Pardoe published this book before the recent meltdown of Wall Street and the banking industry. However, he stresses that, “Warren Buffett made the most of his investments during bear markets or when companies were experiencing temporary but surmountable difficulties and their share prices became depressed” (Pardoe, p. 70). In 1990, Buffett bought five million shares of Wells Fargo when banks were struggling and California’s real estate market was depressed. He liked the management team, the business, and especially the stock price. Pardoe gives a great illustration of this point: “Focus on the tree rather than the forest. Don’t concern yourself with the short term fate of the stock market; concern yourself with the long-term prospects of the business in which you are invested” (Pardoe, p. 82).
The key to your investment success depends on how much effort you exert. You must understand that you are profiting from a company and not the market. Then you have to do your own research and not depend on financial analysts. You should study the underlying business, its earning capacity, and its future to establish the value. It is more important to use cash flow, balance sheets, and future earnings as a motivator rather than stock price. In other words, as Buffett states, get rich slowly. It is more important to know the value of something rather than the price of everything. He follows his criteria and finds opportunities, even in depressed markets.
Not many people have the financial resource of Warren Buffett…or even close to it. However, any investor at any level can follow his style. Buy only stocks that you will not trade for five years or more, and keep an eye on business performance rather than on price performance” (Pardoe, p. 28). Follow these financial strategies and you, too can hope for a more lucrative future.
About James Pardoe
James Pardoe illustrates Warren Buffett’s skills as a value investor rather than a mere stock trader. As the book states,
James Pardoe is the principal attorney with Pardoe & Associates and one of today’s most knowledgeable followers of Warren Buffett. He received his JD from Pepperdine University.
Pardoe also received degrees from the University of California at Berkley and Pepperdine School of Law and has been licensed to practice for 14 years.
Pardoe, J. (2005). How Buffett Does It: 24 Simple Investing Strategies from the World’s Greatest Value Investor. New York: McGraw-Hill