When Warren Buffett talks, it makes sense to listen for investors since there could be simple but winning tips in them – traits that made him the ultra successful investor and businessman he is today and one of the richest men in the world. Motley Fool gives us a few insights from the Sage of Omaha himself.
Businesses Having a Comprehensible Financial Structure
While it helps for new investors to listen to stock analysts and experts, for investors who've been trading stocks for a while it makes sense to invest in financially strong companies in areas of business they have a grasp on. And in those industries, it would be great to invest in businesses that have a wise risk management plan in place, are in sound financial health, and have shareholder-friendly management. True, this could keep you away from a business or industry that turns out to really pick up and have great potential, but it could also keep you from needless risk.
Investing in Industries with an Evaluable Future
In line with this is the next piece of advice – do not invest in a business whose future you may not be able to evaluate. Buffett recognizes industries that have a potential for expansion and demand. He gives the example of television companies around 1950, aircraft manufacturers around 1930, and automobiles in the early years of the 20th century as examples of industries that clearly proved to have the potential to grow immensely.
Identifying the winning companies in these was important though, and anyone who did that would have been on the highway to success. Buffett reminds us that General Motors, Chrysler and Ford were among the few American car manufacturers that survived the Great Depression of the 1930s. So picking the right one mattered back then.
Companies with Simple Management Structure
Again, make sure you choose companies having management structures simple enough to figure out. Choose organizations that do not have one person leading them and would therefore experience a void in management and leadership where that person is not around. Buffett quotes Coca-Cola as an example of a fine management structure, claiming that it has established processes in place that work like clockwork. The company's valuable brand portfolio and flawless distribution network makes it so the company could nearly run itself. In fact, Buffett said that a "ham sandwich" could run Coca-Cola.
Back when Warren Buffett started on his investment adventure in the early 1940s, America was waking up from the Great Depression and the Second World War was affecting economies of the world. There was no better way to learn trading than by actually trading.
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