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Back to Basics: Morningstar's "Five Simple Steps" to Buffett-Style Investing

Friday, 23 Nov 2007 | 3:20 PM ET

Lately we've been covering a lot of ground here on Warren Buffett Watch, including Buffett's defense of estate taxes before Congress, a whirlwind tour of Asia, a supermodel, and even Buffett's advice to a big-time baseball star.

Today, Morningstar's Paul Larson brings us back to basics, with a concise list of Five Simple Steps to Investing Like Buffett.

Larson says that with the "proper focus and attitude" and "nominally intelligent person" can follow Buffett's investment strategy.

Larson's five steps to Buffett investing:

1. Buy businesses, not stocks. Investing does not mean trading. "It is incredibly helpful to think like a business owner and not just a renter."

2. Focus on companies with wide economic moats. Look for companies with cash flows "structurally protected from competition" because they are "low-cost producers" like Wal-Mart, "benefit from customer switching costs" like Bank of America, or have "strong patents and brands" like Coca-Cola.

3. Let intrinsic value be your touchstone. Pay attention to "the value of all the cash that (a) business can generate for its owners in the future, discounted to today's terms." Don't pay attention to "momentum and charts and trading catalysts."

4. Always require a margin of safety. Since no one knows exactly what the future, and thus future cash flows, will bring, "it is highly beneficial to only buy at a discount to fair value."

5. Think independently, and be patient. "To be greedy when others are fearful, and fearful when others are greedy, is some of the best advice Buffett has ever given."

Questions? Comments? Email me at buffettwatch@cnbc.com

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