How to Pick Stocks Like Warren Buffett Summary: Timothy Vick

How to Pick Stocks Like Warren Buffett Summary

How to Pick Stocks Like Warren Buffett Summary provides a free book summary, key takeaways, review, top quotes, author biography and other key points of Timothy Vick’s book regarding Warren Buffett.

Timothy Vick is a famous supporter of value investing. But, in his recent book How to Pick Stocks Like Warren Buffett, he declares value investing as the king. He uses Warren Buffett as the base for his simple lessons on value-investing. Vick shows that the idea of an engaging investment book isn’t fake. He holds up the Buffett example to illustrate the greatest saying about value-investing. That is, over-time, an asset’s price will get its intrinsic value. Buffett also stuck by this mantra during the 90s. This book How to Pick Stocks Like Warren Buffett is a must-read for its clear explanations. You can learn how Buffett examined the market and then mimic him. Because, in the end, the rest were wrong, and he alone was right. 

“The real power of Berkshire derives from its use of financial leverage, that is, the ability to invest amounts well in excess of the company’s capital base.”

This Summary Will Help You Learn

  • How Warren Buffett started his investing career;
  • Why the magic of compounding money is the key to high earnings;
  • What traits Buffett seeks when buying a stock.

Take-Aways

  • Buffett collected a fortune of $30bn with careful investing. He used math to make his investment decisions.
  • Warren created Berkshire Hathaway. This is the most significant investment pool in the world.
  • One of his technique is to buy an already-running business. He then uses its cash flow to acquire cash-rich firms.
  • Buffett looks for profitable firms with easy business models.
  • He seeks the correct mix of price and value in an investment.
  • The magic of compounding interest is the key to building wealth.
  • Over time, value and price perfectly correlate.
  • Copying others when buying shares is the biggest mistake of investors.
  • To be a sound investor, focus on an asset’s value.
  • Focus your buys. Because diversification weakens the ability to get higher returns.

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How to Pick Stocks Like Warren Buffett Summary

Buffett’s Billions: The Beginning

Warren Buffett made a fortune of $30bn with careful investing. He used math to make his investment decisions. For 45 years, he was a fundraiser. His primary method is to buy a cash-making firm. Then he compounds that company’s money at yearly rates of around 20-30%. The proceeds of this go into his investment company – Berkshire Hathaway. He exploits the inefficiencies of the financial world on a repeat basis. And this is how he compounds his income.

Buffett developed an interest in the share market very early on. This was when he started to work for his father’s brokerage firm in Omaha. When he turned 10, Buffett was filing the bond and stock certificates. He also posted stock quotes on a blackboard at the firm. Even as a kid, he used to chart price trends. And, reading investment books was his keen interest. In fact, he bought his first share at the age of 11. This’s when he also started trading paper stock certificates.

College life of Warren Buffett 

Buffett started college at the Wharton School of Business in 1947. He completed his degree from the University of Nebraska. When he was in his 2nd year, Benjamin Graham had a significant influence on Buffett. Graham was a professor at Columbia University. He also wrote the classic “The Intelligent Investor.” Buffett was inspired by Graham’s ways of value investing. In fact, he went to Columbia University to get his master’s degree in economics. Graham taught that shares must mirror a firm’s real worth. Also, it’s possible to gain higher returns if one buys undervalued stocks. Buffett took these principles as his guide to money managing and stock investing.

Buffett Partnership

In 1954, Buffet sold his stocks from his father’s company. He then joined Graham’s investment management firm. There he worked for two years. Buffett collected some $140,000 selling and buying cheap shares. He then used $100,000 from friends and relatives to create his first company. It was an investment pool with the name Buffett Partnership. Buffett’s share was 25% of any income that went beyond 6%.

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Word soon spread about his enterprise as it became a success. Many other investors added funds to it. Buffett chose common shares. But, his strategy was different from other fund managers. He set a pattern of buying a critical position in an undervalued firm. This way he would get a seat on the board. And then, he took a leading role in rectifying the firm’s financial status. Then he’d help the management to sell the firm for a higher price. When he finally closed his partnership in 1969, he had made around $20-25mn.   

Building Berkshire Hathaway

Buffett started buying shares in Berkshire Hathaway in 1962. This was a textile mill in Massachusetts. He then took control of this company in 1967. And later he became its chairman in 1970. By way of this firm, he bought more firms for expanding investments. Finally, he used the company as the world’s biggest investment pool. Buffett kept on reinvesting profits for three decades.

He made a considerable fortune by:

  • Using the cash-flow of existing firms held by Berkshire Hathaway. He cut their costs as needed.
  • Taking advantage of such increasing cash flows to buy other firms.
  • Buying just cash-rich firms at low prices. He then got high returns on the initial investment by raising their net worth.
  • Using cash from bought firms to reinvest in bonds and stocks.
  • Adding a range of insurance firms as channels to buy bonds and stocks.
  • Using such insurers to offer a low-cost float to grow investment funds.

Through this approach, he greatly benefited from financial leverage. In fact, he got a massive float. Over-time, Buffett raised his holding company’s book value. This pushed up its stock value. Buffett also increased his stake in Berkshire to 33.7% by 1999. Overall, he earned a profit of over 40% of the firm’s book value.

Warren’s Secrets of Stock Selection

Buffett’s net worth and Berkshire’s book value increased. It was because of the success of his investments and acquisitions. The features Buffett looks for when picking stocks/companies to buy are:

  • Have a profitable business and straightforward business model.
  • Producing a significant level of cash flow.
  • Being in a somewhat unique business with a sound market position.
  • Have stable and sound management.
  • Is available at prices which make economic and mathematical sense.

The last factor is the most important for Buffett. For him, an investment should make economic sense. He won’t buy an investment in the absence of the right mix of value and price. Or he’ll wait for the unit it suits his profile.

Maximization Through Mathematics

Buffett’s basic approach is in tune with his other principles. That is increasing the magic of compounding money in the long-term. Time’s a key factor. It eats a more significant chunk of your wealth than taxes or inflation. And time increases the impacts all these other factors. Pick a good firm at a decent price. You’re likely to see stock increases. This’s because, in the long-run, increase in firm’s value and stock price correlate. If you pick well, the magic of compounding will make your net worth grow. It’s because:

  1. The longer your funds compound in value, the higher the amount will be.
  2. Your return rate serves as a lever to increase/decrease your wealth. So, add only a few extra percentage points yearly to your returns. This will increase your wealth in the long run.

Buffett’s Favourite Principle

Buffett has a principle which he swears by. It’s that ideal link between value and price will come in the long-run. Over-time, an asset’s price will get its intrinsic value. Be it stocks, currencies, bonds, precious metals or real estate. Hence, don’t pay share prices you can’t justify. Also, avoid stocks which are growing quicker than the company’s value increase. When investors pay excess for stocks, this’s irrational behavior. Because prices will eventually fine-tune with value.

There’s another big mistake investors make. This’s basing trading decisions on others’ actions. For example, ignore Wall Street forecasts. During the 1990s, there was a belief that investors must expect 11% returns yearly on share-market. But, predicting stock-price patterns is risky. Because the share market doesn’t act as expected. Plus, buying too much places a limit on the earnings. Hence, to become successful, avoid marketing scripts like connecting past returns to the future. Rather, focus on an asset’s value as it’s based on earnings. Over-time, no asset will rise quicker than its earnings.

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How Does Buffett Boost Returns?

Use the below strategies to magnify your returns:

  • Buy low and sell high – This is a time-tested rule which still applies. Before buying, check the return ability of a stock. In the last seven decades, many studies also proved this. So, buy undervalued stocks. This will lead to more gains.
  • Keep your purchases concentrated – Diversification weakens your ability to get high returns. The more shares you’ve, the tougher it’s to monitor your portfolio’s losers and winners.
  • Pay attention to expenses – Watch costs like commissions you give your broker. Instead, use deep-discount brokers to decrease your commissions.
  • Reinvest all the dividends and raise your returns.
  • Assess all that you don’t buy or buy now – This should include the decision to spend on unnecessary luxury items. You can turn any pointless money you spend now into several dollars later.
  • Maximize your gains with a buy-and-hold strategy – The ones who hold shares for the long-run increase their earnings. Traders who deal often earn less. Especially if they give commission on every trade. The longer you keep stocks, there’re more chances to make money. This is regardless of your skills to choose stocks.
  • Don’t rely on complex systems. These include market forecasts and complex stock-choosing systems. If you over-forecast, there’d be a long link of errors. In this, even one incorrect prediction will lead to the other.
  • Don’t buy shares only because you’ve money or they’re undervalued – Warren finds the shares he wants. So, he buys them just when dropping to an attractive price.  

Picking Stocks the Warren Way

Examine firms as Buffett does. And then your goal should be to find the real worth of a business. For this, focus on the annual net income the business can give you back. And not just the stock value. See market price only as a reference point to check if its valuation.

Buffett reviews the old standards of valuation. That is, examine a business by how well it can convert sales to earnings. Plus, the yearly rate at which the earnings grow. A firm is worth the current value of its estimated earnings. To predict such future earnings, look at the past. It’s because a firm’s growth history is a reliable estimate of its future. Average previous earnings will help in the realistic analysis of a company.

Also, think about the amount of business risk. The riskier a firm’s earnings are, the less you must pay. Plus, find out the growth rate of the firm. Then use a discounting factor to balance for time-value of money. This is what you surrender in other returns for buying this share.

“The forces that link price to value are inevitable and immutable. Over long time periods, earnings for Standard & Poor’s (S&P) 500 companies cannot grow much faster than these companies’ sales.”

Book Value

You can also apply book value as a measure of growth. Because, as a firm’s book value grows, so does its share price. In the long-term, share-price and book value growth are closely related. Buffett says that a firm’s increase in per-share book value is a good measure. Many firms raise their book-value by growing profits. Besides, they do this by generating high returns and buying firms which add value.

Buffett even uses the 15% rule. He seeks stocks which can return 15% yearly in long-run. Finally, prevent losses by preventing risk. Hence, don’t expose yourself to a higher possibility of loss. Periodic losses are tough to avoid. But, you can reduce your mistakes. Do this by keeping an update of market conditions. Also, buy for the long-run.

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How to Pick Stocks Like Warren Buffett Review

The book “How to pick stocks like Warren Buffet” was written by the most famous support of investment particularly value investment and named as Timothy Vick. In the book the book, he provided a complete biography of the Warren Buffet along with his top quotes and takeaways. The most interesting thing we the book was mimic of the market and intrinsic values for the asset prices. For me, another interesting fact discussed in the book was the magic of the compounding money and how it can be converted to the high earnings. The buying of stocks was one of the famous traits of Buffet. The profitable technique was the use of cash flow and the cash-rich firms that we read double times. The book described uniform high standard and experiences of the managers who tend to describe facts about the techniques and how the profit can be enhanced in the firms. We have learned a lot from the book and the reason was the golden rule described in the book that concentrated on the portfolio. In the past, we have personally learned investment techniques form the books of Warren Buffett and Timothy Vick explained the same points.

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The particular focus of the author, according to my understanding was on the compounds and stocks and he mentioned the ways how one can save the trading cost in the business. The accurate intrinsic value of the stock was sticking to the concept of steady earnings growth. In the framework of the book, we personally followed buffets 15% magic rule in the practical life so the investment in stock and his concepts are correlated to my vision of business investment. The risk of the earning of firms is a fact of business and it was mentioned by the author in the book very simply. “The forces that link price to value are inevitable and immutable. Over long time periods, earnings for Standard & Poor’s (S&P) 500 companies cannot grow much faster than these companies’ sales.”

How to Pick Stocks Like Warren Buffett Quotes

“The real power of Berkshire derives from its use of financial leverage, that is, the ability to invest amounts well in excess of the company’s capital base.”

“The forces that link price to value are inevitable and immutable. Over long time periods, earnings for Standard & Poor’s (S&P) 500 companies cannot grow much faster than these companies’ sales.”

“It is wrong – and frequently risky – to link past returns to the future.”

“Di­ver­si­fi­ca­tion is the bane of high returns. Great value-ori­ented investors such as Warren Buffett have no use for di­ver­si­fi­ca­tion. They are keenly aware that di­ver­si­fi­ca­tion poses no long-term benefit to a portfolio and drags down potential returns”

“The trick is to obtain the float as cheaply as possible, and no insurer has done that better than Berkshire Hathaway.”

“Unless an investment (a company or a stock) can be justified by mathematics, it should be ignored until the right combination of price and value exists.”

“Buffett tells investors that it’s possible to obtain returns far in excess of the market – whether the market rises 10% a year, 2% or 20%.”

“If you can obtain even minor im­prove­ments over the market’s return, you will generate staggering long-term results due to compounding.”

“Mathematics lies at the heart of virtually every endeavor in which Warren Buffett engages.”

“Buffett detests rapid trading. To him, it is a money-wast­ing activity that usually leads to inferior returns for investors.”

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About the Author

Timothy Vick works as a senior analyst at Arbor Capital Management. It has its offices in Chicago, Alaska, Anchorage and Florida. He’s the former editor-in-chief and founder of Today’s Value Investor. Vick also wrote Wall Street on Sale. He was seen on CNN and CNBC on many occasions as a consultant on valuation.

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Best Selling Books

SaleBestseller No. 1
How to Pick Stocks Like Warren Buffett: Profiting from the Bargain Hunting Strategies of the World's Greatest Value Investor
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How to Pick Stocks Like Warren Buffett: Profiting from the Bargain Hunting Strategies of the World's Greatest Value Investor
  • Timothy Vick
  • Publisher: McGraw-Hill Education
  • Edition no. 1 (09/13/2000)
  • Hardcover: 277 pages
Bestseller No. 2
Summary: How to Pick Stocks Like Warren Buffett: Review and Analysis of Vick's Book
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  • Business Book Summaries
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7 COMMENTS

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