How to Invest Like Warren Buffett

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Warren Buffett is perpetually one of the richest people in the world and almost universally considered to be the greatest stock picker the world has ever known. Therefore, Lots of people want to know Warren Buffett’s investment strategy.

While you might not ever be worth $50 billion, you can certainly learn a thing or two from “The Oracle” and greatly increase your wealth over the long term. All you have to do is invest like Warren Buffett.

Though Mr. Buffet has never officially written down his process for evaluating and choosing stocks, there is a lot that can be learned from his letters to his shareholders. With his many letters, we have been able to put a list together to help you think act, and invest like Warren Buffett.

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How to invest like Warren Buffett:

Buy before the hype

Warren’s basic philosophy is to purchase a stock for less than it’s worth and then let the rest of the world finally figure it out, too. This is commonly referred to as value investing and has been the cornerstone of his philosophy from the very beginning.

  • In fact, the rest of the rules are really rules to find these companies.

The company must have strong profitability

Buffet prefers companies that are already profitable as opposed to companies that are likely to someday become profitable. There are several measures he utilizes to determine this. Some of these include Return on Equity (ROE), Return on Invested Capital (ROIC), and the profit margins.

  • ROE – While no one knows for sure, the general consensus is that he wants to see an ROE of 15% or more.
    • Profit Margins – In this case, we’re talking about dividing net income by net sales. Obviously, the higher the better.

The company must have low debt

Too much debt is bad for everyone, including companies. In case you thought we skipped ROIC above, we’re getting back to it now. Sometimes a company will appear to have a high ROE, but the number is actually artificially inflated. This can happen when the company is using debt to pay its bills. This is where ROIC comes into play.

  • ROIC removes debt from the calculation by adding it back to the shareholder equity prior to completing the ROE calculation. You can simply divide the company’s total liabilities by the shareholder equity. The higher the ratio is, the more a company is using debt to grow the company. Be careful.
    • Companies with a lot of debt can be harmed when either interest rates rise or credit becomes harder to acquire.

The company must have competent management

Buffett has always placed a lot of emphasis on a company’s management team. He favors intelligent, humble management that doesn’t simply follow the crowd. He has stated that his company simply allocates capital; it does not provide management.

  • He has traditionally stayed out of influencing a company’s management, but he insists that good management be present. Ensure the companies you invest in are being run by a competent management team.

Comprehension

Buffet refuses to invest in a business that he doesn’t understand. You will find that the businesses in which he invests are relatively simple. He largely avoids technology companies, because as he has stated, he doesn’t really understand that type of business. Only invest in what you are capable of understanding.

Be patient. It seems like Buffett has held some stocks since before the dawn of time. He has held many stocks for 5 years or more before the stock ever rose even 1%. Value investing takes time; you’re going to have to be patient to see the returns. Don’t be in a rush.

While we can’t all be Warren Buffett, we can certainly follow Warren Buffett’s investment strategy. Focus on underpriced companies with a history of profitability, little debt, and a competent management team. And remember to be patient! That is the key to what is Warren Buffett’s investment philosophy.

If you can do these things consistently, you’ll be surprised at the amount of wealth you can gain!

When Dividend-Paying Stocks Are a Mistake

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Dividend-paying stocks can be a great choice for the right investor. Receiving that quarterly dividend check is satisfying. However, dividend-paying stocks aren’t always the best option. There are several circumstances in which investing in stocks that pay a dividend is a mistake. You may be one of the investors that shouldn’t be looking at dividend-paying stocks now.

What is a Dividend?

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A dividend is a payment from a company to a shareholder. Profits can be re-invested in the business for future growth or paid to shareholders in the form of dividends. Companies that pay dividends usually do some of both.

There are two forms of dividends: Cash and Stocks. Most investors are familiar with cash dividends. Some companies prefer to issue additional shares of stock instead of writing of a check.

A company can also utilize a dividend reinvestment plan. The dividends are used to purchase additional shares of stock.

Investing in stocks that pay dividends can be a powerful strategy, especially if you’re investing for the distant future. But dividend-paying stocks aren’t always the best choice.

When Are Dividend-Paying Stocks a Mistake?

There are times to reconsider the purchase of dividend-paying stocks:

The company is struggling. The dividend yield of a particular company can be very attractive if the price of the stock drops significantly. However, consider why the price has dropped.

  • If the stock is a great deal, then go ahead and buy it. If the price has dropped because the company is struggling, beware. The dividend is likely to decrease in the future anyway.

When the stock price is too high to justify the dividend payment. A $0.20 quarterly dividend on a $9 stock is a good deal. The same dividend on a $200 stock is not. Look at how much that dividend is going to cost you.

  • When comparing different companies, look at the dividend yield. The yield is the annual dividend divided by the stock price.
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It’s the wrong type of company. The best dividend paying companies are mature and lack room to grow. Paying a dividend to investors might be the best way for this type of company to spend its excess profits. However, be cautious of a young company in a growing field that’s offering a dividend. That money could be better spent on growth.

  • If a growth company is paying a dividend, find out why. The management team might be making poor decisions.

The company is out of cash. Companies that are running out of money have two choices when it comes to paying dividends: Cut the dividend or borrow money to make the dividend payments. Both actions are likely to hurt the stock price.

  • Stock prices respond quickly to changes in dividend payouts. Be especially careful if the company is running low on cash.

The company’s record of paying a dividend is spotty. Some companies pay their dividends as reliably as the sun rises each morning. Other companies are less reliable. Examine the dividend record of the company in question. In an ideal world, the dividend payments have been increasing regularly.

  • How well has the company met its earnings projections in the past? A company that consistently falls short of expectations is a risky bet.

Interest rates are too high. When interest rates are high, banks can pay better rates than dividend-paying stocks. Keep an eye on how much banks are paying before you purchase any stock shares. Your cash might do better in the bank. Dividend-paying stocks are especially attractive when interest rates are low.

When growth is more important to you than income. Dividends are great when reliable income is important to you. However, if you’re a 24-year old investor with your eye on retirement at age 60, growth is likely to be more relevant. Consider your goals before purchasing a stock that pays dividends.

When the tax status of your account makes dividends less attractive. Dividends are taxed at the same rate as capital gains, which is lower than the ordinary income tax rate for most investors.

  • A traditional IRA account requires that normal income tax rates be paid on withdrawals. This is the worst case.

  • Withdrawals from a Roth IRA are not taxed, provided the requirements are met. This is the best case.

  • A typical brokerage account will result in capital gains taxes on your profits. This option is the middle ground for most investors.

  • Ensure that you’re considering the tax ramifications before you invest.

Investing in stocks that pay dividends is about more than just looking at the yield and creating a buy order. And dividend-paying stocks aren’t always the best choice for all investors. Consider the strength of the company, your tax situation, company history, and your investment strategy.

Just because a particular company pays a dividend doesn’t mean it’s a good investment. Perform the same basic research you would on any other stock.

Additional Tips for Investing in Stocks That Pay Dividends

Look at more than just the yield when purchasing stocks that pay a dividend. The dividend yield is the dividend divided by the stock price. This allows for easy comparison between stocks of different prices.

  • However, the yield is only part of the picture. Consider the underlying financial health of the company. Some stocks have a great yield because the stock price is crashing and the company hasn’t lowered the dividend payment yet.

Avoid purchasing a stock just to collect the dividend. It’s common for investors to attempt to purchase stock before the dividend is paid and then immediately dump the stock after receiving the dividend payment. However, the stock price reflects the dividend payment. Study a few stocks that pay dividends. Look at the drop in price after the dividend is paid.

  • You’ll find that the stock price falls by an amount very close to the value of the dividend payment.
  • Remember that stock prices include all available public information. The dividend payout and date are both readily available to the general public.

Investors love receiving dividend payments. Something is satisfying about getting paid versus holding a stock for 10+ years without putting any money into your pocket. For certain situations, focusing on stocks that pay a dividend can be an excellent strategy. However, there are many times that dividend-paying stocks don’t make a lot of sense.

The Pros and Cons of Socially Responsible Investing (SRI)

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If you have an interest in saving the planet, you’ll be pleased to know that you can use Socially Responsible Investing (SRI) to invest your monies in socially responsible corporations and industries.

Socially responsible investing is a reminder that how you manage and invest your dollars is not only important to you and your family, it can also have an impact on the environment and even society.

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The Definition of Socially Responsible Investing

Investing your money in an ethical, socially conscious way means that you’re placing it in investment vehicles that not only earn you money but also do something positive for others.

Ethical or socially responsible investing usually involves placing your dollars with companies that use environmentally friendly practices, employ diversity when hiring, and manufacture products that are healthy or “good” for consumers. Investing in products or goods that are sustainable would also fall into this category of investing.

How is it Possible to Invest Only in SRIs?

This question is tricky because many companies are not socially conscious. This is important to keep in mind when you invest in mutual funds. Often it can be difficult to determine if all the companies represented in the mutual fund fall into the SRI category.

The best way to invest consciously is to do some homework online to ensure the companies or mutual funds you wish to invest in engage in ethical practices before consulting with stockbrokers and financial planners.

Also, through a process called, “screening,” investors and financiers evaluate companies based on how they perform socially and ethically using specific criteria to measure those elements. Corporations that receive less than satisfactory social responsibility performance scores may not gain investment dollars from ethical investors.

Where and How to Find SRI Companies/Investments

Recently, several socially responsible mutual funds have become available. Major investment companies such as Calvert and Van Eck Global offer socially responsible investments to their customers.

Some investment companies totally focus on offering environmentally friendly/SRI investment products. Portfolio 21 Investments, SRI Wealth Management Group, Parnassus Investments, and Appleseed Fund are a few of those companies.

In addition, various websites specialize in getting the word out about SRIs. Social Funds website is one such example.

Factors to Bear in Mind When Considering Investments in SRIs

Your personal values.

Keep in mind your personal values about sustainability, human rights, employee treatment, and societal good as you make decisions about your investments. Carefully review company brochures, statements, and annual reports to get a feel for their investment environment before investing your dollars.

Possibilities for growth.

Remember that your main reason to invest is to make your money multiply. Even though your values steer you toward SRIs, ensure that you are making the best investment possible for your money.

Higher fees.

Because it costs more to perform tasks ethically and responsibly, don’t be surprised if you pay higher fees to invest in SRI companies and mutual funds.

There is much to know about making socially responsible investments. When you’re about to make any investment, do your homework, consider your personal values, think about the possibilities for growth, and determine your investment costs. With this strategy, your investments work both for your family and the good of the world we live in.

All About Fractional Real Estate Ownership

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So, what is so good about fractional real estate ownership? Well, have you always dreamed of owning a vacation home? What if you could enjoy the benefits of a vacation home, plus take advantage of this real estate to substantially increase your income? What if you could do all this at a fraction of the cost of your vacation home?

All these good things and more are possible with fractional real estate ownership!

How does fractional real estate ownership work?

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Just as several companies and wealthy individuals have fractional ownership of a jet, regular people just like you can have fractional ownership of real estate.

With fractional ownership, several people own an equal percentage of the property. So, imagine you get 4 people to each purchase a 25% share in a second home on the beach.

If the property was worth $400,000, they would each pay $100,000. Then, each person would have access to the property for 365/4 = ~91 days.

How those days are scheduled would be spelled out in the agreement. It’s not uncommon to alternate weeks in the summer and then pick and choose during the rest of the year.

FRACTIONAL OWNERSHIP VS. TIME-SHARES

At this point, you might be thinking ‘time-share.’ While there are similarities between time-shares and fractional ownership, there are several substantial differences.

Typically, fractional ownership is applied to higher-end properties, though it doesn’t have to be. So the property is typically much nicer than the typical timeshare, and there’s the possibility that you could make a significant amount of money should you ever decide to sell your share.

You can rent your time to someone else. This allows for additional income during the times the property is yours to use.

Your heirs can inherit your ownership. Just like other assets you own, your heirs will get your fractional ownership.

Fractional ownership can be endorsed as alternative residences, thus allowing for tax savings. Time-shares don’t offer any tax advantages.

You can allow family and friends to stay during your time. During the time the property is yours to use, anyone you like may use the property.

You can sell your ownership. As with any other property you own, you can sell your ownership.

INCOME BOOST BLUEPRINT

INCREASING YOUR INCOME WITH FRACTIONAL OWNERSHIP

To visualize how you can use your fractional real estate ownership to produce income for you, let’s use our example of a ¼ share in the home mentioned before. Keep in mind that this is a $400,000 property, so it’s a beautiful home with several bedrooms. Think of how much you can charge others to rent this home for their vacation!

Even if you charged $500 per night, it would still be a bargain for the renters when they compare the cost of several rooms in an upscale hotel on the beach. Several couples could team up and enjoy their vacations for much less than staying in a hotel, while also saving money on dining out because your home has a full kitchen.

So your home offers tremendous value for vacationers!

If you enjoy staying in your vacation home for 2 weeks each year, that leaves 77 days each year that you could rent it out to other vacationers. 77 x $500 = $38,500! If you don’t stay there yourself, you could rent it out for your full 91 days for a grand total of $45,500 minus taxes, insurance, and maintenance expenses, of course.

If you have a mortgage on your fraction of the property, you would also subtract your mortgage payments from the total rental income to determine your profits. So, even if you financed your $100,000, you would still come out with substantial income from your property.

START WITH ONE

Fractional real estate ownership can be very lucrative. If you can gain $30,000 per year in income for one fraction of one vacation home, think of the possibilities! After you profit with one, you can use some of that profit to purchase a fraction of another vacation home. With 3 or 4, you’re looking at close to an extra $100,000 per year in income. Of course, this income is dependent upon your renting out the property during your available days. You may wish to hire a vacation rental management company to handle keeping your property occupied if you don’t have the time or expertise to market it yourself. You can also have it listed online by using AirBnB.com and other similar websites.

Fractional ownership of real estate allows you to possess a vacation property beyond what you could afford on your own. Only being responsible for a percentage of the value of the property might allow you to have a chalet in Aspen or a beachfront home in Malibu – or both!

POINTS TO PONDER

The agreements for these can be quite complicated, and it’s best to consult an attorney before any papers are signed.

Ensure you’re comfortable with the other owners, as well as how the time is divided, the cost of the property, maintenance fees, and so on. Don’t jump in before all details are spelled out.

The Future

Fractional ownership of real estate will only continue to become more popular over time. Builders in resort areas are now constructing upscale properties intending to sell fractional ownership in them.

Also, as the economy tightens, more and more people are unwilling to pay full price for a property that they will only use a few weeks or months out of the year.

But everyone still wants nice places to stay on their vacations! So get your portion of a nice vacation home and let these vacation-goers pay you for their vacations!

fractional ownership in real estate offers many benefits, including income, decreased cost, higher levels of luxury, rights of ownership, tax advantages, and flexibility.

Look into these investments and you might be on the beach this summer in that villa or mansion you never thought you could afford – and all paid for with the extra income from your fractional ownership in real estate.

Steps to Take Before Buying Your First Home

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Buying your first home is a major decision because the house will soon become one of your main financial assets. In addition to that, you may be making mortgage payments for at least ten years. It is smart to ponder on how to buy your first home. You shouldn’t take the decision lightly.

To prepare you for ownership, you need to know the steps to buying your first home.

Think over these tips on buying your first home:

Ask yourself if you’re financially stable

Buying your first home will require some stability. Have you had your job for at least five years? Do you have a reliable income? A stable job or having savings that can help you pay off the mortgage over a few years is very important when choosing a home. You don’t want to find yourself in over your head.  

Are you ready to make monthly mortgage payments for the long term?

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Are there any other major expenses in the near future that would make keeping up with your mortgage payments difficult? Mortgage can be a difficult task to take on. You will want to think years in the future for potential issues that may arise that could finically affect your ability to pay for your new home.

Do you plan to stay in this house for at least five years?

The first five years of mortgage payments usually only cover fees and interest. Are you ready to settle down in one spot?

Attempt to Raise your credit score before buying your first home

You can qualify for a mortgage with a credit score of 580, but you’ll have to spend more on fees, interest, and your down payment. You’ll get a much better deal if you wait until you have a credit score of 700 or above.

Take a keen look at your debt to income ratio.

This is a good way to tell if you’re earning enough to afford a home. Ideally, the expenses linked to buying a home shouldn’t exceed a third of your income. Add up your mortgage payments, utilities, property taxes, and expected repairs.

Save money for your down payment

You can buy a home with a down payment of anywhere between 3% and 20% of the value of the home. The more you can afford to pay, the lower your mortgage payment will be. Look into getting an FHA loan to help with the down payment.

Plan for expenses for maintaining your home

You should count on spending at least 3% of the value of the home on maintenance each year. Create a saving fund to cover these costs.

Document your income and assets

Start gathering all the documents you’re going to need while you compare mortgage options.

Look for the right house for you

It’s best to wait until you can afford something better if you don’t find anything you like. Take the neighborhood and its development into consideration when buying a house, since these aspects will influence the future value of the house.

Buying a house is a very important decision. Becoming a homeowner means that you’re taking a big step on the path of financial stability, and you’ll want to be prepared for this step. Your home will likely become your main asset as it appreciates in value and you build up further equity in it by paying down your mortgage.

Buying a home requires careful planning. Ask yourself how much you can afford to borrow, what kind of mortgage would be best, and what kind of home would be adapted to the unique needs of your family. Take the time to go over your income, boost your credit score, and make a list of what to look for in your ideal home before you start your search.