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Warren Buffett Principle #7 Be Debt Free

Guest post by: Pia Lord

Article Overview: Operating a business or for that matter personal finances from a debt free position allows you great freedom and flexibility. The opposite is true of debt encumbered businesses, nations and personal finances. When we have no debt, we pay as we go. We can save and are in front of the eight ball calling the shots. Careful manuevering is required to remain in such a position, especially in such a volatile economic climate.

Warren Buffett Principle #7 Be Debt Free



We run our business in a debt free manner. We are reluctant to enter into an agreement involving debt for something that we don’t need and don’t want for the sake of something that may bring about higher returns but involves inordinate amount of risk.

Such a statement directly explains how a company like Berkshire Hathaway can remain debt free over the years, while at the same time increasing its portfolio of business holdings. The strategy of sit back and wait for the right time and the right opportunity looms on the horizon. Warren Buffett is well known for buying in the market when the rest of the investors are running scared and heading for the hills, selling off their shares before the price drops to nothing. Warren Buffett on the other hand, sees a buying opportunity when the prices begin to decline. In fact he strategically waits and then when the price is sufficiently low, makes his move. I have read that he is not even really most concerned with the price level at which he buys the stock, rather he considers the actual value of the company itself. The price earnings level is important. When this ratio is below 20 then he considers the company for a buy, this being only one of the factors involved though.

When buying stocks in companies understanding the intrinsic value of a company is vital. This value includes the book value, the value of good will, the value of the company in relation to its industry and the strength of the company with regard to the direction the industry is going. Can the company be a front player in the industry? Does the company have cutting edge products to position itself in the frontline of the global economy? Is the industry that the company is in experiencing a tailwind or a headwind?

Questions such as these play into the intrinsic value of the company. A great company may have great products, but may be saddled by legal issues if the government has imposed sanctions. A company with great products, albeit luxury ones, may not get the sales if the economy is experiencing a downturn.

Debt free companies, debt free individuals, debt free nations should be everyone’s goal for 2010 and beyond.. What you sow, you shall reap. There fore if you are creating a bunch of debt, it will come back and avalanche against you. On the other hand if you are building savings little by little that will snowball in your favor.

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Article Tags: business education, calling the shots, debt free business, economic climate, personal finances, warren buffett
Referred by: http://jaykubassek.com



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