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What Warren Buffett asks before buying stocks

"Which shares should I buy? Which stock will give maximum returns? Where can I double my money in 6 months?" 

Most people bug their brokers, advisers and agents day-in and day-out with these or similar such queries. Even the colleagues, friends and relatives, who are into equity investing, aren't spared.

Well, to be frank, if this the way you too make your equity investments then the consequences would be disastrous. You would definitely agree that Warren Buffett didn't make his billion dollar wealth in this manner.

If you wish to improve your success rate at the stock markets, you have to change your line of inquiry... to one that is intelligent, incisive and productive. Listed below are some of the key questions that you must ask yourself, before placing that all-important buy order with your broker. 

i.  Do I know what products the company manufactures or the services that it offers? And do I clearly understand them and their end-use?  

ii. Are the company's products / services in demand? Does the company's future look bright as the buyers are likely to remain faithful for many more years?

iii. Do I know the promoters and the management team of the company? Do they enjoy a good reputation for their business acumen and corporate governance?

iv. Do the other companies in the group inspire confidence?

v. Does the company enjoy leadership position in its industry? Does it have any advantage such as a prominent brand, intellectual property, etc.?

vi. Has the company been making genuine profits at least for last 3-5 years? 
[See 'Don't get conned by "doctored" EPS']

vii. Does the company have a strong balance sheet in terms of debt-equity ratio, dividend record, price/book value, return on networth, etc.?

viii. Is the current market price of the share fairly valued i.e. its PEG ratio is <= 1? 
[See 'PEG Ratio demystified!']

ix. Does the stock have decent daily trading volume?

x. Will the new share add diversity and value to my existing portfolio of stocks?

If, and ONLY IF, you "affirmatively" answer most of the above queries, should you consider buying that particular equity share. If not, you would be doing yourself a big favour by ignoring it.

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Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

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