IN THIS EPISODE, YOU’LL LEARN:
- Who are Preston and Stig, and why did they create TheInvestorsPodcast?
- How does Warren Buffett invest?
- What is the intrinsic value?
- What is a share?
Stig has studied stock valuation at Harvard University, worked as a power trader (it was as stressful as it sounds!), and now works at a college professor in finance (more fun than it sounds!). Preston graduated from West Point with a degree in aerospace engineering. Together they have studied and written books about Warren Buffett and how he invests in stocks.
Preston and Stig decided to share their passion with the world, and stood up the site BuffettsBooks.com a few years ago. The next natural step has been creating this podcast to talk about Warren Buffett and other billionaire’s investing approach. In later episodes they will bring in guests to join the lively discussion.
HOW DOES WARREN BUFFETT INVEST?
Think about Tom Cruise in Jerry Maguire. He works as a sports agent and is being told to have one purpose: “Show me the money!!!”. Investing is really as simple as that. Warren Buffett wants to know how much profit a company is making. Ultimately there is no reason to buy a stock if it’s not profitable, or soon going to be profitabnle.
Valuation does not have to be hard. As a rule of thumb you can multiply the yearly net income of a company by 10. So a coffee shop with a net income of $10,000 could be valued at $100,000. This is the same as having a Price to Earnings ratio (P/E) of 10. In other words you pay $10 for $1 profit (or a 10% annual return). As you can see Warren Buffett wants to buy stocks with a low P/E. For example, if the P/E was 5, and the profit was still $10,000 for the Coffee Shop, that would offer the potential buyer the same business for $50,000 (or a return of 20%).
WHAT IS INTRINSIC VALUE?
Intrinsic value is a fancy word for “what is the company really worth”? Warren Buffett is a smart guy, and always knows what the true value of a stock is before he buys it. Just like everybody else, Warren Buffett likes shopping and finding good products at discounted prices… However, when he shops, it is not at the local mall – he shops at the stock market. An important piece of the puzzle to figuring out the intrinsic value for Warren Buffett, is asking how much money the company is making, how much will it continue to make, and how much is he willing to pay for that profit, or net income.
WHAT IS A SHARE?
A share is a small ownership of a real business. Think about it like this: A single slice of pizza has the same taste as the whole pizza. Unless you are very rich, you won’t have the option to buy the whole business. Businesses know that, and therefore break-up their companies into small pieces (or shares) so everybody can afford a piece. For just $20-40 you can buy a single share of some of the biggest businesses in the world. The great part is the share is completely proportional to every other share, therefore owning one share is no different than owning all of the shares.
Who said you need to be a genius to become a billionaire? This simple and fantastic quote from Warren Buffett pretty much sums up the most im
portant takeaway for the first episode:
“Rule #1, don’t lose money. Rule #2, don’t forget rule #1.“ – Warren Buffett
HOW TO BUY YOUR FIRST STOCK
One of the most common questions we recieve is which broker do you use? We recommend TradeKing.com because they only charge $4.95 per trade and have no annual fees. Additionally, they will give you $1,000 worth of trades for opening an account and $150 if you switch from another broker. Watch the video above if you want to learn how to open an account.
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