Firstly, to understand how to invest like Warren Buffett you must understand the basics of how he invests. Buffett invests using what is called value investing in the investing world.
To understand the concept of value investing, we must first lay down the foundation and define what is value trading vs. value investing. We’ll begin with value trading first.
To make the understanding of value trading easy and clear, we’ll illustrate it by observing Kyle McDonald’s website and experiment One Red Paper Clip.
What Kyle did was, as an experiment, he wanted to see what he could trade for one red paper clip and continuously trade the items that he got up for more “valuable” items.
From the red paper clip he got a fish pen for it.
From the fish pen, he traded it for a doorknob.
And so on and so forth. He traded the items up until he eventually received a house.
So what happened in this experiment was Kyle knew the perceived value of what each was. His goal was to find someone who was willing on trading with him something of more value than the item he had.
Note that the items that he held never changed in value. For instance, if the doorknob that he held was worth $2 when he received it, it was still worth the same amount when he traded it. But people were willing on trading items with him that were worth more in his perceived value, until he received a house. For what reasons we don’t know.
This is value trading. The key word is trading.
This concept is the same translated into trading in the stock market. People buy and sell stocks (trading money for stock), and hoping to trade it to someone else who is willing to give something more valuable for it (more money).
This usually happens in the short term, so the actual value of the stock usually doesn’t change much in value, if at all. The gain in trading the stock for more money is what is sought after when implementing value trading method.
Value Investing (COMING SOON)