Over the last sixty years, the world has come to know one of the greatest stock investors of all time - Warren Buffett. Although a lot is known about what stocks Warren Buffett owns, few understand how he picks them. Hopefully, this little guide will help.
The first thing a person must understand to invest like Warren Buffett is that owning one stock is no different then owning an entire business. For example, if you own 1 share of Wal-Mart, you will make the exact same return, relatively speaking, if you owned all the shares. You see, Warren Buffett looks at the ownership of 1 share as if it was a miniature business. To demonstrate this idea, let's image that we opened a game of monopoly. As you probably remember, there are plastic hotels used to play the game. Now, Imagine that you place one of these plastic hotels down on a desk in front of you. As you look at that plastic building, imagine that it's a miniature business; let's call the business Wal-Mart Mini. Since the business is so small, it's only worth $75. When you buy this miniature business for $75, you can expect to make a profit every year. For this particular business, it makes a profit of $4.65 each year. As you can see, if you spend $75 purchasing this tiny company, you'll most likely make a 6.2% return on your money. Return equals the profit ($4.65) divided by the cost to own the business ($75): $4.65/$75
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