The 4th installment of this publication concerns the debt/equity ratio, another major cog of Warren Buffett's classical investing strategy. In reality, it is an element that the master himself deals with very cautiously when it comes to decide which stocks to put money in. Similar to the return on equity in the 3rd installment of this publication, it is an formula that is typically employed in finance, nevertheless, Buffett uses it more effectively that anyone else.

   The components that make up the debt/equity ratio are fairly obvious and I'm certain that many people first heard of it in high school in a commerce or business class. But just in case, there's still some confusion, I will give a quick, brief explanation. The debt/equity ratio is given by total liabilities of a company divided by shareholders' equity.

   Both total liabilities and shareholder's equity can be found on a company's balance sheet (sometimes known as the statement of financial position). This is known as taking its 'book value'. On the other hand, if the concerned company's debt and equity are publicly traded, you can use the market value instead. There is also the possibility of using a mixture of both the book and market value.

   The ratio illustrates the proportion of debt and equity the company is utilising to support its assets. If a ratio is high, this corresponds to a situation where debt is mainly shoring up the company. The principal dilemma with a high ratio is that it renders earnings volatile and leaves it at the mercy of interest rates, which can be expensive.

   This is something that Buffett takes very seriously and it's important to understand the reasons why. Like everyone else, he prefers to see a small amount of debt and the reason why is that small amount of debt means that earnings growth is being generated from shareholders' equity as opposed to borrowed money. If a company is using borrowed money to finance its earnings, this tends to commence a vicious cycle of debt and repayments which is volatile and which is at the mercy of interest rates.

   What investors should take from this part of the series is that they should focus on companies that possess a low ratio, but not just any low ratio, it must be low compared to other companies in the same sector. It's not difficult to get the numbers necessary to calculate such a ratio, because as I highlighted in a previous paragraph, this is all available on company reports which themselves are publicly available.

   Some investors use only long-term debt instead of total liabilities in the calculation of the ratio. This could prove to be more useful and convenient as investing in stocks is for the long-term not the short-term. This is not just my own personal view, but Warren Buffett's own way of thinking.

   The next and final part of this series will focus on the remaining element of Buffett's methodology - profit margins, an undervalued concept in finance today. Stay tuned!

Stock Picks - Hot!

By: Sharron Nixon

      Would it not be fair to presume that those investing in the stock market would be really great at managing their money? There is such a lot of information available, both spoken and written, you would think there would be no excuse not to do well with stock picks. In reality, that just is not the case.

   Even though it is pretty easy to access a wide range of financial information these days, successful investing remains a mystery for many people. The biggest problem is not the lack of information, as there is plenty of information around for anyone who wants it. The real issue is the lack of security and predictability, and the way in which people deal with it.

   It is a basic wish for people to be secure, and they also like a certain degree of predictability in their actions and investments. But balancing this is their desire to make a profit. The biggest problem is that in order to attain high profits, there is usually a high degree of risk.

   Of course, one solution to this dilemma would be to simply put your money in a savings account, collect a little interest and just relax. If this sounds good to you, you are probably better off taking this course of action, and you do not need to read the rest of this article.

   So, if you're reading this, you are probably not satisfied with the small returns that you get with savings accounts, and you need your money to work a little bit harder for you.. But you would still like to minimize your uncertainty, and find a certain amount of predictability in what you are doing. I can give you a prediction that has a very high degree of certainty.

   If you invest in the stock market, two things are bound to happen. You are going to win some, and you are going to lose some.

   That should at least cover the uncertainty factor. This probably sounds a bit simplistic and if it does, that is good, because the point I am trying to make is very simple. It just is not feasible for you to make money every single time you make a transaction. Even Warren Buffet does not make money on every single investment he has ever made, and you are talking about a master here. The best traders and investors in the world lose money on a certain number of their transactions

   On the flip side, it is very difficult to lose money every time you invest. Perhaps you may have heard of some people who claim that they have lost on every investment they have ever made, but chances are they are this is not true . Even these people have made money on some of their transactions, but they probably re-invested that money into other stocks that ended up losing money.

   It can be likened to the time spent sitting at a slot machine. After you play for a while the machine will start throwing out a mountain of coins, resulting in a nice profit. But instead of calling it a day and pocketing your winnings, you simply keep pouring money into the machine until the very last coin. Then you go home wondering why good luck never comes your way. The fact is, you did do ok, but it is what you do with your windfall that matters.

   It is important to face the fact that losing some money from time to time is ok, and you need to accept that. This does not give you the excuse to feel fine every time you lose money. You should always have the goal of making a profit, but you need to be aware of the fact that you cannott realistically expect to make a profit every single time. This will ease some of the fears of failing, since losing money on an investment does not mean you are a failure as an investor. Many people never get started just because they are afraid of losing money. And if they do lose money, they feel they have failed and retreat from the stock market in its entirety, never to return again.

   If this has not personally happened to you yet, just take a look around. Do you ever remember a friend or relative telling you about their investments? Just about every time you bumped into them they would tell you how good their stocks were doing and how much profit they were making. And then, suddenly, they completely dropped the subject. They never said anything about it again. And if anyone asked them how their stocks were doing, they would either mumble something inaudible or utter some kind of defensive statement. What is likely to have happened? You guessed it. They lost their money and withdrew from activity in the stock market. They have essentially given up, and in doing so, they have lost. Not because they lost money, but because they gave up.

   If you want to be a successful investor, you cannot afford to handle it like that. The thought of giving up surface when things are not going your way, but you should never give in to it. When it comes to successful investing, your attitude is more important than your knowledge, just as this rings true in many other areas of life.

   You should always try to learn all you can about investing because you do need knowledge. Even if that knowledge is just the basics of how the stock market works. You also need to learn from your mistakes, but you have to realize that you will not be successful 100% of the time. So before you put your money into the stock market, or any other investment for that matter, remember this: You will win some and you will lose some.