Here Are 6 Rules For Investing Like Warren Buffett
Buffett does not mess with small companies. The company need to produce a minimum of $75 million in pre-tax earnings.
He has no interest in speculation when it comes to earnings. In other words, future earnings, management forecasts, and any other future projections are not considered when making decisions. Earning ability MUST be proven and consistent to spark any interest.
3. Little to No Debt
The bottom line is that Buffett hates debt. The company must be earning solid returns without taking on debt. Debt, while needed in some circumstances, is a profit killer. Let the company pay off its initial debt first and prove itself before placing your first dollar at risk. When in debt, companies can take unwise risks during slow times. This potential simply creates too much risk to make a safe investment.
There needs to be an experienced management team already in place before an investment is made. Buffett has no interest in supplying management to run the company. Management should be pedigreed with experience in prior positions or trained from the company itself. Buffett looks for smart, talented people who can solve or better yet avoid problems.
You must be able to fully understand the businesses you are investing in. If the company or its business is too complicated, avoid it. Obviously, this rule can be bent as a stock market investor. While it is best to understand a company and its business completely, it’s not a hard and fast rule. This rule goes hand in hand with Peter Lynch’s mantra of buying what you know.
6. The company must be listed with a price
While this Buffet rule is not applicable to average stock investors it is important to understand. Buffett does not buy companies without an asking price. This goes back to belief in only buying sure things. Firms without an asking price require too much negotiation effort to be worthwhile to Buffett. Individual investors can apply this rule by only investing in listed companies. Avoid investing directly in firms that are private or not listed on a stock exchange. While these firms can be wildly lucrative, the unknown risk factors are sky high.
Resource: Here Are 6 Rules For Investing